Capital Structure

CHAPTER 14 - PERFECT CAPITAL MARKETS

Financing: Equity vs Debt

Financing: Equity vs Debt

 

You commonly finance your firm through equity (E, eget kapital) or debt (D, skuld).

 

Unlevered equity: firm financed with no debt

Levered equity: equity in a firm that is partly financed by debt

 

 

Risk and Return - With the effect of leverage

 

Leverage increases the risk of equity in a firm, even where there is no risk that the firm will default.

Cash flows of levered equity cannot be discounted at the same level as unlevered equity.

The discount rate needs to take into account - compensate - for the increased risk.

 

 

 

 

 

Modigliani-Miller I

 

Law of one price: Leverage will not affect the value of a firm

 

Generally: Under perfect capital market conditions

 

 

 

 

 

 

Capital Structure

CHAPTER 15 - DEBT AND TAXES

Capital Structure

CHAPTER 16 - MARKET IMPERFECTIONS

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By Lovisa von Heijne