Management and Organizational Studies 3311A/B Lecture Notes - Lecture 5: Capital Structure, Cash Flow, Transaction Cost

• School: Western University
• Department: Management and Organizational Studies
• Course: Management and Organizational Studies 3311A/B
• Professor: Jun Wang

Document Summary

Topic 4: capital structure (chapters 16 & 17) Typical financing decisions include: how much debt and equity to use in financing the firm, the timing of when to issue debt and equity, when (or if) to pay dividends. We consider the effects of changing only capital structure (reinvestment is constant): any increase in debt is used to repurchase (and retire) outstanding shares, any decrease in debt is financed by issuing new shares. The capital structure of a firm doesn"t affect its value when: no taxes, no transaction costs, complete information, investors and firms face a common borrowing rate. Adding debt, not adding debt, % debt used does not affect a firm"s value: using debt will exaggerate the state of the economy, economy is bad- using debt will worsen, economy is good- using debt will help. Increasing leverage ratio does not affect the firm"s value (pv bondholder + pv shareholder)