Lecture Business finance (9/e) - Chapter 13: Principles of capital structure

Chapter 13 Principles of Capital Structure Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 13–1 Prepared by Dr Buly Cardak Learning Objectives • Explain the effects of financial leverage. • Distinguish between business risk and financial risk. • Understand the ‘capital structure irrelevance’ theory of Modigliani and Miller (MM). • Explain the roles of taxes and other factors that may influence capital structure decisions. Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 13–2 Prepared by Dr Buly Cardak Learning Objectives (cont.) • Understand the concept of an optimal capital structure, based on a trade-off between the benefits and costs of using debt. • Explain the ‘pecking order’ theory of capital structure. • Outline Jensen’s free cash flow theory. Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 13–3 Prepared by Dr Buly Cardak Introduction • Capital structure – The mix of debt and equity finance used by a company. • Optimal capital structure – The capital structure which maximises the value of a company. – Does the value of the net operating cash flow stream depend on how it is divided between payments to lenders and shareholders? Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 13–4 Prepared by Dr Buly Cardak Effects of Financial Leverage • Business risk – The variability of future net cash flows attributed to the nature of the company’s operations (the risk faced by shareholders if the company is financed only by equity). • Financial risk – The risk attributable to the use of debt as a source of finance. Copyright 2005 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance by Peirson, Brown, Easton, Howard and Pinder 13–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn