MP A R Munich Personal RePEc Archive The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review Anton Miglo University of Bridgeport 2010 Online at http://mpra.ub.uni-muenchen.de/46691/ MPRA Paper No. 46691, posted 6. May 2013 19:07 UTC The Pecking Order, Trade-off, Signaling, and Market-Timing Theories of Capital Structure: a Review Anton Miglo Associate professor, University of Bridgeport, School of Business, Bridgeport, CT 06604, phone
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Equity Capital: This refers to money put up and owned by the shareholders (owners). Typically, equity capital consists of two types: 1.) contributed capital, which is the money that was originally invested in the business in exchange for shares of stock or ownership and 2.) retained earnings, which represents profits from past years that have been kept by the company and used to strengthen the balance sheet or fund growth, acquisitions, or expansion. Many consider equity capital to be the most expensive
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more risk. Optimize the use of debt in the capital structure – The concept of optimal capital structure stands for the growth, nevertheless the techniques used by management sometimes limit it in favour for the higher rating. Repurchase undervalued shares – In a number of cases this component may lead to directing the cash flows not in the projects with positive NPV, which may impede growth. 2. How does Marriott use its estimate of its cost of capital? Does this make sense? Marriott used (or
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Βdyn_Lev = βu_ind x [1+ (1-T) x D/Edyn] = 0.25 x [ 1 + (1+0.29) x 0.82] = 0.39 Chapter 13 question 15 (pg 442) β = 1.3 E (Rm) = 14% Rf = 5% E(r) = Rf + β x [E(Rm)-Rf] – EMRP formula = 5 + 1.3 (14 - 5) 5 + 1.3 x9 16/7% Session 3 Cost of capital Question 3 pg 472 E (R) = Rf + βE(EMRP) = 4% + 1.15 x 8 = 13.2% Slide 6 applies Re = E1/Po + g = D0(1+g)/P0 +g = 1.8(1+0.05)/34 + 0.05 = 10.56% Rc_ave = 13.2+10.56/2 = 11.88% Question 6 pg 472 WACC (cost of funds the company
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for In-class Presentations and Term Papers 1. Grading The information in the handouts is not very clear and does not include the case, so here some more precision about the grading rules: Everybody should do a writeup for the Wrigley Capital Structure Case. If you only do the case the final exam will count for 70% and the case writeup for 30% of the final grade. In case you want to improve your grade you should think about handing in a term paper or making an in-class presentation. If you
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FINC 5000 LESSON NOTES – WEEK 7 CHAPTER 15 Capital Structure Introduction: Capital Structure Theory - Capital Structure refers to the proportion of debt and equity being used to finance a firm’s assets: Assets = Debt + Equity Capital Structure - In this lesson we will examine the notion that capital structure affects the value of the firm. That is, the value of the firm might change with the amount of debt that is present. -
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Calculation of WACC of a Multi-Division Corporation 2. Sources of Data and their limitation 3. Use of CAPM, Cost of Equity, Effect of Leverage on the Ce, WACC 4. Use of data for comparable to estimate asset betas for division-specific cost of capital 5. Biases and Limitations No financial modeling. In the previous years they would include WACC as part of case study 3 – Now it has been changed to 2 – without any actual financial statements. No excel modeling. Focused on how to address the
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FINANCIAL MANAGEMENT AND POLICIES FIRST YEAR REQUIRED COURSE PACKET Quarter III, Spring 2010 FACULTY Section I: Section II: Section III: SectionIV: Section V: FINANCIAL MANAGEMENT AND POLICIES Quarter III, Spring 2010 Elena Loutskina Marc Lipson Robert Conroy MarcLipson Elena Loutskina IMPORTANT SCHEDULE ANNOUNCEMENT: Thursday, February 19 is a DAY LONG exercise that requires your participation until 5:30pm that evening. By compressing the exercise into a single day we were able to designate
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Cost of Capital Introduction This paper examines key elements of a cost of capital policy to facilitate objective management and allocation of corporate funds. In order for a company to make long-term investments to grow, whether that is new equipment, new products or other assets, managers must be aware of the cost of acquiring any of these assets. The obvious objective for these managers is to earn more than the cost of capital and in doing so will increase their company’s market value. If
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From investopedia.com Modigliani and Miller's Tradeoff Theory of Leverage The tradeoff theory assumes that there are benefits to leverage within a capital structure up until the optimal capital structure is reached. The theory recognizes the tax benefit from interest payments - that is, because interest paid on debt is tax deductible, issuing bonds effectively reduces a company's tax liability. Paying dividends on equity, however, does not. Thought of another way, the actual rate of interest
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