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5 Cards in this Set
- Front
- Back
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What is the capital structure? |
The mix of securities measured at market value used by corporations to finance real investments |
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What are the two important questions of capital structure? |
1. Is it possible to create shareholder value through capital structure decisions? 2. If so, what is the reason to value creation? |
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What are the assumptions of MM? |
1. Perfect capital markets (frictionless, no taxes, no bankruptcy costs, symmetric information implying no signalling opportunities, no interest-conflicts implying no agency problems and no financial innovation). 2. Fixed investment policy 3. Dividend policy is irrelevant. |
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What does MM prop 1 state? |
The market value of any firm is independent of it's capital structure.
Proved by arbitrage opportunities if the value of the unlevered and levered firm is different. Investors can borrow at the same rate as corporations, i.e. construct homemade leverage. |
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What does MM prop 2 state? |
Expected return of a common stock is of a levered firm is the same as the expected return of an unlevered firm plus a risk premium for financial risk. |
