Chapter 16 Cue Cards

Question	Answer
What is capital structure	Mix of debt and equity to value a firm
Whose names stand for MM	Modigliani and Miller
Does the market value of a company depend on capital structure without taxes?	No It doesn't. Managers cannot increase company value by changing mix of securities / equity etc.
What is Homemade Leverage	Whatever a company achieves by changing structure can be replicated by shareholders themselves.
More debt in a capital structure means what about EPS?	More Risky.
Formula for Firms debt-equity ratio	r-Equity = r-Assets + D/E x (rAssets - rDebt)
Interest Tax on debt is deductible T/F	True
What is an interest tax shield	Tax Savings resulting from deductibility of interest payments
Corporate taxes but no financial distress costs, increases value of firm from leverage T/F	True
What is MMs Modified Proposition 2	Required return on firms equity increases as firms Debt-Equity Ratio increases
What are costs of Financial Distress	Costs from bankruptcy or decisions related to bankruptcy
What is the trade off theory	Financial Managers choose level of debt which will balance the firms interest tax shields against costs of financial distress
What is Pecking order Theory	Firms prefer to issue debt rather than equity if internal finance is insufficient (Debt issues are less likely to be interpreted by market as bad)
What is the goal of the Financial Manager	Maximize value of the firm

Resource summary

	Created by dylan_earl over 9 years ago