tailieunhanh - Lecture Essentials of corporate finance (2/e) – Chapter 13: Leverage and capital structure

In this chapter you will understand the effect of financial leverage on cash flows and cost of equity, understand the impact of taxes and bankruptcy on capital structure choice, understand the basic components of bankruptcy. | Leverage and capital structure Chapter 13 Key concepts and skills Understand the effect of financial leverage on cash flows and cost of equity Understand the impact of taxes and bankruptcy on capital structure choice Understand the basic components of bankruptcy 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Chapter outline The capital structure question The effect of financial leverage Capital structure and the cost of equity capital Corporate taxes and capital structure Bankruptcy costs Optimal capital structure Observed capital structures A quick look at the bankruptcy process 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Capital structure Capital structure—percentage of debt and equity used to fund the firm’s assets ‘Leverage’ = use of debt in capital structure Capital restructuring—changing the amount of leverage without changing the firm’s assets Increase leverage by issuing debt and repurchasing outstanding shares Decrease leverage by issuing new shares and retiring outstanding debt 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Capital structure and shareholder wealth What is the primary goal of financial managers? To maximise shareholder wealth We want to choose the capital structure that will maximise shareholder wealth. We can maximise shareholder wealth by maximising firm value or minimising WACC. 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Remind students that the WACC is the appropriate discount rate for the risk of the firm’s assets. We can find the value of | Leverage and capital structure Chapter 13 Key concepts and skills Understand the effect of financial leverage on cash flows and cost of equity Understand the impact of taxes and bankruptcy on capital structure choice Understand the basic components of bankruptcy 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Chapter outline The capital structure question The effect of financial leverage Capital structure and the cost of equity capital Corporate taxes and capital structure Bankruptcy costs Optimal capital structure Observed capital structures A quick look at the bankruptcy process 13- Copyright © 2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Capital structure Capital structure—percentage of debt and equity used to fund the firm’s assets ‘Leverage’ = use