This summary provides insight into many theory topics relevant to Corporate Finance. It covers topics such as Modigliani and Miller's approach to capital theory and their assumptions; the different market forms in the Efficient Market Hypothesis; how to deal with Capital Rationing, and more.
A structure
company's Capital
Modiglian , is the
way a company
finances its
- and assets . A
company can finance its
operations by either equity or
Miller & , fferent combinations of debt and
equity.
capital
There structure
are theories that attempt to
various
establish a relationship between the financial
leverage of a company
(the proportion of debt in the
company's capital structure) with
Its market value .
The
Modigliani and Miller approach to capital theory advocates the
capital structure irrelevancy theory·
This
suggests that the valuation
of a firm is irrelevant to a
company's capital structure .
Whether firm lower debt component
a is
high on
leverage or has a
has no its market value Instead , the market value
bearing on .
of a Firm is
solely dependent on the operating profits of the company
.
Therefore ,
the Modiglian , and Miller Approach indicates that ,
suppose the operating profits and future prospects are the same ,
the value of a
leveraged firm has a mix of debt and equity) is the
same as the value of an
unleveraged firm (a firm wholly financed
by equity) As a result , if an investor purchases shares of a
.
cost them the
Leveraged firm It would , same as buying the shares
of unleveraged Firm
an .
Assumptions of
Modigliani and Miller
·
There are no taxes
and
Transaction cost For buying selling securities as well
·
,
the cost n
as
bankruptcy ,
is
·
There is a
symmetry of information . This means that an
investor will have access to the same information that a corporation
would , and investors will thus behave rationally
·
The cost of borrowing is the same for investors and companies
·
There is no floatation cost (such as an
underwriting
commission ,
payment to )
merchant bankers , advertisement expenses etc ,
·
There is no corporate dividend tax
A the of
merger is
pooling
Merges interests
which results
by two business entities
in common owner-
and
Ship .
Aquisitions An acquisition normally involves
a
larger company (a predator)
acquiring a smaller one (a target)
In an efficient capital market , it would seem highly likely
that it will always be cheaper from the investors point of view to
gain
the benefit of investment in two companies them in a
by combining
portfolio rather than for management to achieve the same results
through acquisition . It is also true that many acquisitions are likely
to increase a Firms exposure to market risk rather than reduce it .
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