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
CHAPTER 15 - DEBT AND TAXES
CHAPTER 16 - MARKET IMPERFECTIONS