Capital Structure

Well, if you wonder what the title implies, its me talking about the ownership structure of the firm. Yes, the Question that bugs most CFOs. How will finance the firm? Debt? Equity? Both debt and Equity? or preferred shares? What are the best combinations that reduces cost of capital (WACC) to the firm?

Firstly, Modigliani and Miller (1958) said there is no effect of combination of financing units with the firm value. Firm is valued upon the real assets the firms has, not the financial assets it creates. It is a mere marketing problem, whether the firm will want to sell the assets. Whole or pieces? Myers, in the Search of the Optimum Capital Structure(1984) said that there is no magic in leverage. He gave an example of how the firms can sell its assets by analogizing a chicken. CHicken you wondered? yea..he gave examples why firms with high debt ratio will not benefit from the debt it issued. First issue raised was the tax credits. Secondly, financially distressed firms with high intangibles will not benefit from high leverage, as its intangible asset can be written off as expense..

Well, that is it now.

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