Does capital structure influence firms value?

Business & Finance, Finance & Investing, Finance
Cover of the book Does capital structure influence firms value? by Ulrike Messbacher, GRIN Verlag
View on Amazon View on AbeBooks View on Kobo View on B.Depository View on eBay View on Walmart
Author: Ulrike Messbacher ISBN: 9783638449472
Publisher: GRIN Verlag Publication: December 20, 2005
Imprint: GRIN Verlag Language: English
Author: Ulrike Messbacher
ISBN: 9783638449472
Publisher: GRIN Verlag
Publication: December 20, 2005
Imprint: GRIN Verlag
Language: English

Essay from the year 2004 in the subject Business economics - Investment and Finance, grade: 1, University of Applied Sciences Kempten (University of Ulster), 9 entries in the bibliography, language: English, abstract: In accordance with the Signalling model by Ross (1977) an increase in gearing represents, in term of a company's prospective cash flows, a positive signal to external investors. Because, due to the higher risk of financial distress, companies with less optimistic market prospective tend to avoid additional financial obligations. This implies that an increasing indebtedness means a higher quality of business and therefore better valuation. This leads, in turn, to the assumption that the corporate management can influence a firm's value by changing its capital structure. If capital structure can affect value, how can firms identify an optimal capital structure and what will it look like? It is that mix of debt and equity that maximises the value of a firm and, at the same time, minimise overall cost of capital. In their seminal article, published in 1958 and 1963, Modigliani and Miller argue that under certain assumptions the value of a firm i s independent of its capital structure, but with tax-deductible interest payments, they are positively related. Moreover, there are other approaches with partly contradictory perceptions. For instance, Myers (1998, cited in Fairchild 2003, p.6) argues that there is no universal optimal mix of debt and equity; in fact it depends on firms or industries, and therefore should be considered on a case-by-case basis. Other researchers have added market imperfections, such as bankruptcy costs, agency costs, and gains from leverage- induced tax shields to the analysis and have maintained that an optimal capital structure may exist (Hatfieldet al.1994, p.1). First, this paper shows the basic determinants of a firm's value in association with the impact of financial leverage on payoffs to stockholders. Secondly, it considers some arguments of capital structure theories, particularly the Modigliani and Miller theorem and the Traditional approach and contrasts them. Finally, the underlying factors of the model assumptions are examined and shown that they are important in the choice of a firm's debt-equity ratio.

View on Amazon View on AbeBooks View on Kobo View on B.Depository View on eBay View on Walmart

Essay from the year 2004 in the subject Business economics - Investment and Finance, grade: 1, University of Applied Sciences Kempten (University of Ulster), 9 entries in the bibliography, language: English, abstract: In accordance with the Signalling model by Ross (1977) an increase in gearing represents, in term of a company's prospective cash flows, a positive signal to external investors. Because, due to the higher risk of financial distress, companies with less optimistic market prospective tend to avoid additional financial obligations. This implies that an increasing indebtedness means a higher quality of business and therefore better valuation. This leads, in turn, to the assumption that the corporate management can influence a firm's value by changing its capital structure. If capital structure can affect value, how can firms identify an optimal capital structure and what will it look like? It is that mix of debt and equity that maximises the value of a firm and, at the same time, minimise overall cost of capital. In their seminal article, published in 1958 and 1963, Modigliani and Miller argue that under certain assumptions the value of a firm i s independent of its capital structure, but with tax-deductible interest payments, they are positively related. Moreover, there are other approaches with partly contradictory perceptions. For instance, Myers (1998, cited in Fairchild 2003, p.6) argues that there is no universal optimal mix of debt and equity; in fact it depends on firms or industries, and therefore should be considered on a case-by-case basis. Other researchers have added market imperfections, such as bankruptcy costs, agency costs, and gains from leverage- induced tax shields to the analysis and have maintained that an optimal capital structure may exist (Hatfieldet al.1994, p.1). First, this paper shows the basic determinants of a firm's value in association with the impact of financial leverage on payoffs to stockholders. Secondly, it considers some arguments of capital structure theories, particularly the Modigliani and Miller theorem and the Traditional approach and contrasts them. Finally, the underlying factors of the model assumptions are examined and shown that they are important in the choice of a firm's debt-equity ratio.

More books from GRIN Verlag

Cover of the book Bilanzielle Behandlung langfristiger Vermögenswerte nach IFRS 5 by Ulrike Messbacher
Cover of the book Die Einführung der vier Grundrechenarten nach Maria Montessori unter Berücksichtigung des heilpädagogischen Aspektes bei Kindern mit Lernbehinderung by Ulrike Messbacher
Cover of the book Risikomanagement und Controlling by Ulrike Messbacher
Cover of the book Cash Flow Rechnung nach IFRS by Ulrike Messbacher
Cover of the book Statistik mit SPSS. Fallstudie: Mitarbeiterbefragung by Ulrike Messbacher
Cover of the book Prospekthaftung und Kapitalerhaltung by Ulrike Messbacher
Cover of the book The acquisition of two mother tongues - Early childhood bilingualism by Ulrike Messbacher
Cover of the book Islamic Feminism. An overview of Islamic feminism activities with a focus on the Islamic feminism in the Islamic Republic of Iran by Ulrike Messbacher
Cover of the book Truppenführung: Operationsart Verteidigung by Ulrike Messbacher
Cover of the book Schülermotivation durch Handlungsorientierung im Musikunterricht - Versuch der Produktion einer Filmmusik zum Stummfilm 'The Gold Rush' von Charlie Chaplin by Ulrike Messbacher
Cover of the book Comparing Higher Education Institutions/Systems by Ulrike Messbacher
Cover of the book Utopie und Zeitsemantik - Zur gesellschaftlichen Konstruktion der Zeit by Ulrike Messbacher
Cover of the book Textzusammenfassung - Karl Marx / Friedrich Engels: Manifest der Kommunistischen Partei 1848 by Ulrike Messbacher
Cover of the book End-of-Life Care aus der NutzerInnenperspektive by Ulrike Messbacher
Cover of the book Der Vermeersche Raum by Ulrike Messbacher
We use our own "cookies" and third party cookies to improve services and to see statistical information. By using this website, you agree to our Privacy Policy