Management and Organizational Studies 2310A/B Chapter Notes - Chapter 16: Capital Structure, Financial Distress, Internal Financing

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 2310A/B
• Professor: Shang Tang

Document Summary

Financial leverage and capital structure policy- chapter 16. Capital structure question and the pie theory: the value of a firm- the sum of the value of the firm"s debt and the firm"s equity, v = b + s. Involves changing the amount of leverage a firm has without changing the firm"s assets. Maximize stockholder wealth: we want to choose the capital structure that will maximize stockholder wealth, we can maximize stockholder wealth by maximizing firm value or minimizing wacc. Maximizing the growth opportunities that the firm values. If we have a really good year, then we pay out our fixed costs and we have more left over for our stockholders. If we expect ebit to be greater than the break-even point, then leverage is beneficial to our stockholders. Required rate of return on the firm"s assets. The value of the firm is not affected by the changes in capital structure.