COMMERCE 3FA3 Chapter : 3FA3-CH16.docx
11 Apr 2012
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Chapter 16: financial leverage and capital structure policy. M&m proposition 1: the value if the firm is independent of its capital structure. M&m proposition ii: a firm"s cost of equity capital is a positive linear function as capital structure. Business risk: the equity risk that comes from the nature of the firm"s operating activities. Financial risk: the equity risk that comes from the financial policy of the firm. Interest tax shield: the tax saving attained by a firm from interest expense. Unlevered cost of capital: the cost of capital of a firm that has no debt. Direct bankruptcy costs: the costs that are directly associated with bankruptcy, such as legal and administrative expenses. Indirect bankruptcy costs: the difficulties of running a business that is experiencing financial distress. Financial distress costs: the direct and indirect costs associated with going bankrupt or experiencing financial distress.
