Chapter 17 Leverage and Capital Structure 0
0 Chapter 17 Leverage and Capital Structure
Chapter Outline The Capital Structure Question The Effect of Financial Leverage Capital Structure and the Cost of Equity Corporate Taxes and Capital Structure Bankruptcy Costs Optimal Capital Structure Observed Capital Structures A Quick Look at the Bankruptcy Process
1 Chapter Outline n The Capital Structure Question n The Effect of Financial Leverage n Capital Structure and the Cost of Equity n Corporate Taxes and Capital Structure n Bankruptcy Costs n Optimal Capital Structure n Observed Capital Structures n A Quick Look at the Bankruptcy Process
Key Concepts and Skills Understand the effect of financial leverage on cash flows and cost of equity Understand the impact of taxes and bankruptcy on capital structure choice Understand the basic components of the bankruptcy process 2
2 Key Concepts and Skills n Understand the effect of financial leverage on cash flows and cost of equity n Understand the impact of taxes and bankruptcy on capital structure choice n Understand the basic components of the bankruptcy process
Capital Restructuring We are going to look at how changes in capital structure affect the value of the firm,all else equal Capital restructuring involves changing the amount of leverage a firm has without changing the firm's assets Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new shares and retiring outstanding debt 3
3 Capital Restructuring n We are going to look at how changes in capital structure affect the value of the firm, all else equal n Capital restructuring involves changing the amount of leverage a firm has without changing the firm’s assets n Increase leverage by issuing debt and repurchasing outstanding shares n Decrease leverage by issuing new shares and retiring outstanding debt
Choosing a Capital Structure What is the primary goal of financial managers? Maximize stockholder wealth We want to choose the capital structure that will maximize stockholder wealth We can maximize stockholder wealth by maximizing firm value or minimizing WACC
4 Choosing a Capital Structure n What is the primary goal of financial managers? q Maximize stockholder wealth n We want to choose the capital structure that will maximize stockholder wealth n We can maximize stockholder wealth by maximizing firm value or minimizing WACC