Corporate Finance

* Taking on debt gives the company the ability to use cash for projects and short term investments.

c) Optimization of the capital structure is also consistent with the growth of the company. The optimal capital structure

Capital Structure As shown in the financial income statement (Exhibit3), Intel Corp. (INTC) has a capital structure consisting most of equity. Intel has very little debt in its capital structure and the cost of debt would have only a marginal effect on the overall cost of capital. The current capital structure of Intel is not optimal yet since optimal capital structure is making minimum weighted-average cost of capital.

Home Depot & Capital Structure Finding the perfect capital structure in terms of risk and reward can ensure a company meets shareholder expectations and protects a firm in times of recession. Capital structure refers to how a business puts its money to “work”. The two forms of capital structure are equity capital and debt capital. Both have their benefits and limitations. Striking that perfect balance between the two can mean the difference between thriving versus trying to survive.

There are many similar theories about the optimal leverage point. Calculation of the firm value and cost of capital can also get the same conclusion.

OPTIMAL CAPITAL STRUCTURE (OCS) Nevertheless, the use of the Optimal Capital Structure (OCS) is the right techniques to be used in order to acquire the right combination of debt and equity that can maximize the

A firm can choose a mix of three modes of financing i.e. issuing shares, borrowing from the market and use of retained earnings. The ratio of this mix of funds purely depends on the firm and known as optimal capital structure of the firm. This leads to the different capital structure theories. These theories explain their

2.0 Current Capital Structure Generally, firms can choose among various capital structures in order to maximize overall market value of the company. It is proposed however, that

A capital structure policy aims to balance the trade-off between the benefits of debt financing (interest tax shield) and the costs of debt financing (financial distress and agency costs). Every firm should set its target capital structure such that its cost and benefits of leverage ultimately maximise the firm’s value. Graham and Harvey asked 392 firms’ chief financial officers whether they use target debt ratios. Results show that the majority of them do, although the level of strictness of the target policy varies across different companies. Only 19% of the firms avoid target ratios, of which most are likely to be the relatively smaller firms. This clearly

It is believed that Efficient Market Theory is based upon some fallacies and it does not provide strong grounds of whatever that it proposes. More importantly the Efficient Market theory is perceived to be too subjective in its definition and details and because of this it is close to impossible to accommodate this theory into a meaningful and explicit financial model that can actually assist investors in making the investment decisions (Andresso-O’Callaghan, B., 2007).

Capital structure is the mixture of equity and debt finance used by the company to finance its assets. This terms created many issues around the decisions on how to have perfect capital structure for the firm to run well. Modigliani and Miller’s irrelevance theory is the most important and puzzling issues that have strong impact on the modern corporate finance theory and which is challenged the tradition optimal capital structure theory the most. After more than 50th years of existence, M&M is still one of the most controversy theory brought about many debates on the financing behavior of corporate in the business world. That is the reason for financial researchers and analysts consider this theory as a central financial concept for the study the capital structure decision. Along with this theory, the contribution of trade-off theory and pecking order theory to examine the optimal capital structure is contribute by other reaserchers.

The trade-off theory of capital structure refers to the suggestion that a business chooses the

Introduction SKYCITY Entertainment Group Limited (SKY) is a leading entertainment and gaming business which has been a successful brand and has an iconic performance status since when the company first listed in New Zealand NZX in 1996. The core business of SKY is operating monopoly casinos in New Zealand (Auckland, Hamilton

FIN 450 Rami Ahmed Al Hasan @16253 Elias Elkoussa @17067 May Mohammed @14325 Deena Shalab@16457 Reem Hani Arab @16185 CASE 4 An Introduction to Debt Policy and Value 1 (Table format and content from case) 0% debt/100% equity 25%debt/75% equity 50%debt/50% equity BV of debt 0 $2,500 $5,000 BV of equity $10,000 $7,500 $5,000 MV of debt 0 $2,500 $5,000 MV of equity $10,000 $8,350 $6,700 Pretax cost of debt 0.07 0.07 0.07 After-tax cost of debt 0.0462 0.0462 0.0462 Market Weight of Debt 0 0.23 0.43 Market Weight of Equity 1.0 0.77 0.57 Un-levered Beta 0.8 0.8 0.8 Risk free rate 0.07 0.07 0.07 Market premium 0.086 0.086 0.086 Cost of equity 13.88% 15.4% 20.8% WACC 13.88% 13.5% 13.8% EBIT $2,103 $2,103 $2,103 - From this set of problems, we can see that leverage is good for the firm. Leverage has increased the value of the firm as a whole and increased the price per share. Although the cost of debt increases the firm's risk because it increases the probability of default and bankruptcy, therefore shareholders will require higher rates of return on the equity they provide, debt also provides tax savings. And we can see that in table 4, where we calculated the total value of the firm as the pure business cash flows plus the tax savings. Another reason why debt increases firm value is the fact that it reduces WACC, because the cost of debt is generally lower than the cost of equity. Another option that shareholders can do is using homemade leverage. Shareholders should pay a premium for the shares of a levered firm when the addition of debt increases value.

Already in 1958, Modigliani and Miller have pointed the discussion of capital structure towards the cost of debt and equity. According to their first proposition, in a world of no corporate taxes and with perfect markets, financial leverage has no effect on a firm’s value. In their second proposition, they state that the cost of equity equals a linear function defined by the required return on assets and the cost of debt (Modigliani and Miller, 1958).