BUSI 530 Chapter 16: Chapter 16
Document Summary
Capital structure: mix of long term debt and equity financing, does not increase the underlying value of the firm. When there are no taxes and capital markets function well, the market value of a company does not depend on its capital structure. In other words, financial managers cannot increase value by changing the mix of securities used to finance the company . Process of changing the firm"s capital structure without changing its assets. The value of the firm must be unaffected by its capital structure . Mm"s proposition i (debt irrelevance proposition: under ideal conditions, the value of a firm is unaffected by its capital structure. Operating risk: risk in firm"s operating income, also called business risk. Financial leverage: debt financing to amplify the effects of changes in operating income on the returns to stockholders. Financial risk: risk to shareholders resulting from the use of debt. Debt finance does not affect operating risk but it does add financial risk.
