forego a low debt capital structure for a 40% target debt ratio and attempt to cut their dividend. In the period of 1965-1981, Du Pont had undergone drastic change in their capital structure policy. Increases in industry capacity surpassed demand growth, driving prices down. Along with inflation’s effect on required capital spending, the oil shock driving up costs, a recessionary environment for the industry, and the vertical acquisition of Conoco, Du Pont’s capital structure was near unrecognizable
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Capital structure is such a general things in finance, however, we will still confuse about it. Hence, we are going to write a literature review about the capital structure. Capital structure can be explained in many ways as it can be divided into many parts. Our main focus is the effect on capital structure and the imperfection of the market. The most general effect of the capital structure is the trade-off theory, pecking-order theory and agency cost. Besides, capital structure may influence towards
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yield debt and to reduce interest expense in order to achieve a more balanced capital structure. After this restructuring BEAV’s debt to value came down to 79%6. Tom McCaffery, chief financial officer (CFO), had some major concerns over BEAV’s financial growth. Few of the concerns are as following: 1. Should the company use some of its cash to further reduce its debt expense?7 2. What would be the optimal capital structure the company can have?8 3. Would the company’s retained earnings be sufficient
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Economic Value Added (EVA) EVA is not actually a new discovery. The concept of EVA has been described in the first theoretical basis of capital structure and company value was presented in the academic papers by two financial economists, Franco Modigliani and Merton H. Miller in 1958, later has been known as M&M (Modigliani-Miller) theorem. The basic theorem states that the value of a firm is unaffected by how the firm is financed, whether by issuing stock or selling debt. However, Modigliani
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traditional theory of optimal capital structure assumes that there is an optimal debt-equity ratio (and thus an optimal capital structure) for every company. The optimal level of gearing describes a situation with minimal financial cost. Thereby specific behaviours of the investors are assumed. For a given total capital a company is able to minimize the average cost of capital by substituting more expensive equity through cheaper debt. By doing this the average cost of capital and thus the market
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Number 2 Winter 2010 29 Using Microsoft Corporation to Demonstrate the Optimal Capital Structure Trade-off Theory John C. Gardner, Carl B. McGowan Jr., and Susan E. Moeller1 ABSTRACT In this paper, we apply the trade-off theory of capital structure to Microsoft. We use data for bond ratings, bond risk premiums, and levered CAPM betas to compute the cost of equity and the weighted average cost of capital for Microsoft at different debt levels. This study shows the impact of increasing
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savings. The firm’s optimal capital structure is the debt ratio that maximizes the market value of the firm’s assets. We have to analyze how a change in firm’s debt ratio affects: 1 – Profitability, measured with earnings per share (EPS); 2 – Market value of its assets; 3 – Share price; 4 – Cost of capital. Example: 100% equity finance Example: Borrow $100M @ 10% and repurchase of 1M shares EPS increases, but firm’s value remains the same. MM Theorem – capital structure does not increase
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examine capital-structure theory, issues, and debates, while showing how capital-structure choices affect a firm’s return on investment (ROI) and its risk profile. Directions Your Assignment is to select a publicly-held company and to analyze its capital structure, applying the theories and principles found in Chapter 15 of the text. The structure of your research paper should include: • A preview of capital structure issues • Business and financial risks related to capital structure • Modigliani
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DETERMINANTS OF CAPITAL STRUCTURE Introduction Modern theory of capital structure instigated with the seminal paper of Modigliani and Miller [1]. In brief, the MM theory states that the market value of a firm is determined by its earning power and the risk of its underlying assets, and is independent from its corporate financing decisions. In fact, the MM theory provided conditions under which a firm’s financial decisions do not affect the value of the firm. The fundamental conditions under which
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experiencing steady growth and success due to its effective operations and quality products in its industry. It has unique capital structure with zero debt and large cash balance corresponding to its conservative operation strategy and corporate culture and philosophy. Whether to change to a more aggressive capital strategy and what is the optimal level of debt-to-capital ratio for Hill Country is the key issue in this case. * Hill Country’s operation strategy and its corporate culture The
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