BU393 Chapter Notes - Chapter 12: Cash Flow, Merton Miller, Agency Cost
Document Summary
Capital structure: mix of lt debt and equity used by the firm to finance its assets. Buying shares on margin increases risk and expected return. Increases risks to shareholders = shareholders require higher return: anything that affects required returns also affects value, since value is just the discounted. Optimal capital structure = capital structure that results in highest firm value (optimizing mix of debt and equity) Lever = machine that amplifies force exerted at one end to produce larger force at other end. Operating leverage: fixed costs create operating leverage; they accentuate the variability of operating profits relative to the variability of sales measured by degree of operating leverage (dol: more fixed assets = fulcrum slides to right. High degree of operating leverage, small increase in sales produces very big change in operating profit (measured by ebit: earnings before interest and taxes (ebit): earnings before interest and taxes are deducted.
