FINA 2710 Chapter Notes - Chapter 16: Capital Structure, Capital Asset Pricing Model, Cash Flow
4 Apr 2017
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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. We want to choose the capital structure that will maximize stockholder wealth. We can do this by maximizing firm value or minimizing wacc. When we increase the amount of debt financing, we increase the fixed interest expense. If we have a really good year, then we pay our fixed costs and we have more left over for our stockholders. If we have a really bad year, we still have to pay our fixed costs and we have less left over for our stockholders. Leverage amplifies the variation in both eps and roe. Find ebit where eps is the same under both the current and proposed capital structures. If we expect ebit to be greater than the breakeven point, then leverage is beneficial to our stockholders.
