Debt vs. Equity and Asymmetric Information: a Review

To further my understanding of the financial world, I arranged work experience with Tideway Investment in London. At first sight this appeared to be a surreal world where moving money around creates more money. I began to learn more about the realities of valuing companies and stock. This

An investment project should be accepted only if the NPV is equal to the initial cash flow.

Several internal factors can influence the valuation of a company, however, in the subsequent are some factors that will assist management in protecting its shareholders. The first reason is the desire to generate profits for the company, as a profitable firm will attract investors. Secondly, the need to improve the management of a company can lead to valuation as the information can be used to spur growth. Valuation will assist in understanding some of the factors affecting the value of the company such as client relationships, financials, image, technology employees, and marketing. Proper management is implemented after identifying the issues affecting the organization’s value. Thirdly, communicating to the public accurate and current information is essential in attracting investors and maintaining transparency, which builds the company image.

It is important to know the proper technique and method of valuing a company because different people may have different ways of assessing the value; it is also important in understanding the bank’s method of appraising and valuing a company or business

Financial management is a work plan that details the revenue and expenses of a company. Financial decisions are strategies that achieve the financial objectives of a company that include capital budgeting, capital structure, and working capital management. Modigliani and Miller (1958) received the Nobel Prize in economics for their study of the relationship between capital structure and corporate value, with and without corporate tax. Whether financial management decisions influence firm value is still debated daily because there are plenty of uncertain factors. In this paper, I intend

The intrinstic value of a firm may increase due to a positive future perception of investor towards firm that firms future cash flow will increase due

What is surprising, however, is that despite a 51% increase in long term debt during 2014, Martinrea’s debt to equity ratio actually decreased. A closer look at the notes to the financial statements reveals the cause of this decrease. First, while long term debt increased significantly during 2014, the 12% increase in overall liabilities was less significant. As the result of their purchase of the remainder of Honsel Aluminum, Martinrea removed a liability from their balance sheet which previously represented a put option that could force them to purchase this remaining portion. Martinrea ended up making the purchase before this option was exercised, and the removal of this liability dampened the increase in total liabilities. Second, the acquisition of Honsel significantly removed the equity attributable to a non-controlling interest, causing a 24% increase in equity attributable to the shareholders of the company (despite total equity only increasing marginally). These two factors lead to a decrease in Martinrea’s debt to equity ratio.

Since the emergence of the so-called irrelevance theorem by Miller and Modigliani (1961), many corporations are puzzled about why some firms pay dividends while others do not. They were the first to study the effect of dividend policy on the market value of firms by assuming that there are no market imperfections. Miller and Modigliani (1961) proposed that divided policy chosen by a firm has no significant relationship in as far as the market valuation of the firm is concerned. They went further to explain that; the shareholders wealth remains unchanged irrespective of how the firm distributes it income because the firms’ value is rather determined by their investment policies and the earning power of its assets. They further stated that the opportunity to earn abnormal returns in the market does not exist, that is, owners are entitled to the normal market returns adjusted for risk.

Most of the time Americans spend more money than they earn, which leads them into debt. However, every so often you end up with extra money in your pockets from a sudden windfall like a birthday, or if you’re lucky a tax refund. Wondering what the best use for that money is? A quick trip to Vegas sounds like fun but most of us know there are better ways to spend it. So what should you do with the extra cash? The first thing to do is pay off your debt or any money you borrowed from someone else. If you have more than one type of debt, you should pay down the one with the highest interest rate first which is usually your credit card and after that you should try to save a good chunk of change for emergencies. It’s smart to imagine what

This Corporate Finance paper focuses on analyzing the challenges that Northampton Group Inc. (NGI) is facing as it tries to increase shareholder value. In the case study it is stated by the firm’s major shareholders, that they believe NGI is currently undervalued. In connection with this, the management of NGI is considering several means of increasing the shareholders value. Due to difficult economic conditions resulting from the Global Economic Crisis, there are both

Capital structure theory provides some insights into the value of debt verses equity financing. Modern capital structure theory began in 1958, when Modigliani and Miller proved, under a very restrictive set of assumptions, that a firm’s value is unaffected by its capital structure. There are 4 theories:

Applying the equilibrium theory to Diageo we can segregate the scale into “benefits of debt” and the “costs of debt”. The analysis of each component of the theory is as follows:

There is no universal theory of the debt-equity choice, and no reason to expect one. In this essay I will critically assess the Pecking Order Theory of capital structure with reference and comparison of publicly listed companies. The pecking order theory says that the firm will borrow, rather than issuing equity, when internal cash flow is not sufficient to fund capital expenditures. This theory explains why firms prefer internal rather than external financing which is due to adverse selection, asymmetry of information, and agency costs (Frank & Goyal, 2003). The trade-off theory comes from the pecking order theory it is an unintentional outcome of companies following the pecking-order theory. This explains that firms strive to achieve an

6. Yes, we think that it is better for the society if companies use debt. This allows people who have extra funds and need to invest it to earn interest revenue on their funds. Debt is generally less risky than equity investing because as we know debt has certain maturity date and

The relationship between capital structure and firm value has been discussed frequently in the literature by different researcher accordingly, in both theoretical and empirical studies. It has also been discussed that whether the firm has any optimal capital structure that has been adopted by an individual firm, or whether the proportions of debt usage is completely irrelevant to the individual firm value.