Management and Organizational Studies 3311A/B Chapter Notes - Chapter 16: Capital Structure, Perfect Competition, Tax Shield

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

Document Summary

The capital-structure question and the pie theory: value of the firm (v) is defined as the sum of the value of firm"s debt (b) and firm"s equity (s) V= b+ s: if the goal of the firm"s management is to make the firm as valuable as possible, then the firm should pick the appropriate debt-equity ratio. Maybe they should be interested in strategies that maximize shareholder value: 2) what is the ratio of debt to equity (d/e) that maximizes the sh"s value. Changes in capital structure benefit the sh if and only if the value of the firm increases. Maximizing firm value vs maximizing shareholder interests: in general, changes in capital structure benefit sh if and only if firm value increases. Can hurt sh if firm value decreases: therefore managers should choose the capital structure that maximizes the firm value, sh should care about maximizing firm value rather than strategies that maximize equity value only.