Valuation and Capital Structure: A Review and Integration

The following sections are included:

• Introduction

  • Components of Capital Structure

  • Opportunity Cost, Required Rate-of-Return, and the Cost of Capital

• Bond Valuation

  • Perpetuity

  • Term Bonds

  • Preferred Stock

• Common-Stock Valuation

  • Valuation

  • Inflation and Common Stock Valuation

  • Growth Opportunity and Common-Stock Valuation

• Financial Leverage and Its Effect on EPS

  • Measurement

  • Effect

• Degree of Financial Leverage and Combined Effect

• Optimal Capital Structure

  • Overall Discussion

  • Arbitrage Process and the Proof of M&M Proposition I

• Possible Reasons for Optimal Capital Structure

  • The Traditional Approach of Optimal Capital Structure

  • Bankruptcy Costs

  • Agency Costs

  • Imperfect Markets

• Summary and Remarks

• Questions and Problems

• Appendix 6.A. Convertible-Security Valuation Theory

• Appendix 6.B. Derivation of DOL, DFL, and CML

• Appendix 6.C Derivation of Dividend Discount Model

• References for Appendix 6

• References for Chapter 6