2nd Midterm Review

Dr. Bader Alhashel

Chapter 14 Capital Structure & Leverage

• Book, Market, or “Target” Weights?– Capital– Capital structure– Optimal capital structure

• Business & Financial Risk– Factors that affect business risk– Operating leverage– Operating break-even– Financial leverage

Chapter 14 Capital Structure & Leverage

• Determining the Optimal Capital Structure– WACC & Capital Structure Changes– The Hamada equation– Unlevered Beta– The optimal capital structure

Chapter 14 Capital Structure & Leverage

• Capital structure theory– Modigliani & Miller Irrelevance Theory– The effect of taxes– The effect of potential bankruptcy– Trade-off theory– Signaling theory

• Asymmetric information• Signal• Reserve borrowing capacity

– Using debt financing to constrain managers– Pecking order hypothesis

Chapter 14 Capital Structure & Leverage

• Degree of Leverage– Degree of operating leverage– Degree of financial leverage– Degree of total leverage

Chapter 15 Distributions to Shareholders

• Dividends versus capital gains– Dividend irrelevance theory– Reasons some investors prefer dividends• Bird-in-the-hand fallacy

– Reasons some investors prefer capital gains• Other dividend policy issues– Signaling hypothesis– Clientele effect• Catering theory

Chapter 15 Distributions to Shareholders

• Establishing the dividend policy– The residual dividend model– Payment procedures

• Stock dividends & stock splits– Effect of stock prices

• Stock repurchases– The effects of stock repurchases– Advantages of repurchases– Disadvantages of repurchases– Conclusions on stock repurchases