The connection between the capital structure decision and the value of the company was established in Chapter 4 with respect to financial risk. In this chapter, complexities are examined, including taxes, financial distress, and agency issues. | Chapter 5 Capital Structure Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The capital structure decision affects financial risk and, hence, the value of the company. The capital structure theory helps us understand the factors most important in the relationship between capital structure and the value of the company. Copyright © 2013 CFA Institute 2 Pages 199–200 Introduction The connection between the capital structure decision and the value of the company was established in Chapter 4 with respect to financial risk. In this chapter, complexities are examined, including taxes, financial distress, and agency issues. 2 2. The Capital Structure Decision Copyright © 2013 CFA Institute 3 Development of the theory of capital structure, beginning with the capital structure theory of Miller and Modigliani: LOS: Explain the Modigliani–Miller propositions concerning capital structure, including the impact of leverage, taxes, financial distress, agency costs, and asymmetric information on a company’s cost of equity, cost of capital, and optimal capital structure. Pages 200–205 2. The Capital Structure Decision The basis for capital structure theory is the Modigliani and Miller theory. 3 The Weighted average Cost of Capital The weighted average cost of capital (WACC) is the marginal cost of raising additional capital and is affected by the costs of capital and the proportion of each source of capital: WACC = rWACC = (5-1) where rd is the before-tax marginal cost of debt re is the marginal cost of equity t is the marginal tax rate D is the market value of debt E is the market value of equity V = D + E Copyright © 2013 CFA Institute 4 LOS: Explain the Modigliani–Miller propositions concerning capital structure, including the impact of leverage, taxes, financial distress, agency costs, and asymmetric information on a company’s cost of equity, cost of capital, and optimal capital structure. Page 200 The Weighted Average Cost of Capital We use the weighted . | Chapter 5 Capital Structure Presenter’s name Presenter’s title dd Month yyyy 1 1. Introduction The capital structure decision affects financial risk and, hence, the value of the company. The capital structure theory helps us understand the factors most important in the relationship between capital structure and the value of the company. Copyright © 2013 CFA Institute 2 Pages 199–200 Introduction The connection between the capital structure decision and the value of the company was established in Chapter 4 with respect to financial risk. In this chapter, complexities are examined, including taxes, financial distress, and agency issues. 2 2. The Capital Structure Decision Copyright © 2013 CFA Institute 3 Development of the theory of capital structure, beginning with the capital structure theory of Miller and Modigliani: LOS: Explain the Modigliani–Miller propositions concerning capital structure, including the impact of leverage, taxes, financial distress, agency costs, and asymmetric .
