My File

Main contents : Capital Structure theory : Modigiani miller theory (M & M ) Assumptions of M-M: 1.The companies do not be defy observe 2.Do not need to pay commission/fees to investment bills bankers /brokers on raise of capital 3.Do not cook to pay lawyers when alliance is declare bankrupt. 4.Perfect market 5. internal information of company is share by either 6. some(prenominal) firms and investors can borrow at the real(prenominal) interest measure. ·Modigliani- miller (M-M) proposition 1: The value of a firm is the same regardless of whether it finances itself with debt or legality. The weighted average monetary value of capital is constant. Under MM assumptions ,firm identical in all aspects apart from capital construction should nonplus same value. note value is determined by stream of operating cash flows and the percentage point of barter risk attaching to these , regardless of how cash flows are divided aside b etween different classes of investor. Under MM and excluding revenue enhancementes ,WACC breathe the same- as gearing increases the impact of increasing cost of uprightness ( Ke )is exactly offset by the lower cost of debt ( kd ) as shown in diagram .

Note from the diagram that a truly high level of gearing MM believe that ke would surrender as equity risk taker come into the market electric switch the existing shareholders who impart sale their part of shares due to detective work of increase of risk factor . Further extension of debt get out increase cost of debt as lenders will increase roam! of interest on debt due to increase in cake of debt . This implies in calculation : ·Vg = Vug ·Keg= Keu + D/E ( Keu - kd ) ·WACC g = WACC ug Vg Value of geared entity Vug Value of un-geared entity Keg = Cost of equity geared Keu = Cost of equity un-geared Kd= Cost of debt MM WITH TAXES : In 1963 MM theory accepted that corporate revenue enhancementation could have an impact as interest expense provide tax advantage . Therefore it was drawn that interest expense...If you want to regenerate a full essay, order it on our website: BestEssayCheap.com

If you want to get a full essay, visit our page: cheap essay