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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Financial Leverage and Capital Structure Policy

Learning Objectives

After studying this chapter in the textbook, you should be able to:

Explain how financial leverage affects earnings per share (EPS) and return on equity (ROE).

Compute the degree of financial leverage. Interpret your results.

Define and compute the indifference earnings before interest and taxes (EBIT) and explain its importance in selecting between alternative financing opportunities.

Define and explain the term homemade leverage.

Explain why determining the optimal capital structure is important.

State the pair of Modigliani and Miller (M&M) propositions without and with corporate taxes and discuss their implications.

Distinguish between business and financial risk. Quantify these risk measures.

List the key components of bankruptcy costs. Distinguish between direct and indirect components.

Outline the effects of financial distress costs on the value of the firm.

Discuss the implications of the static theory of capital structure.

Understand what messages capital structure theory has for corporate financial managers.

(Appendix 16A) Incorporate the effects of personal taxes on the value of the levered firm.

2002 McGraw-Hill Higher Education
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