Capital Structure and Dividend Policy

13 Corporate-Financing Decisions and Efficient Capital Markets 339

14 Long-Term Financing: An Introduction 371

15 Capital Structure: Basic Concepts 390

16 Capital Structure: Limits to the Use of Debt 422

17 Valuation and Capital Budgeting for the Levered Firm 468

18 Dividend Policy: Why Does It Matter? 495

Part II discussed the capital budgeting decisions of the firm. We argued that the objective of the firm should be to create value from its capital budgeting decisions. To do this the firm must find investments with a positive net present value. In Part IV we concentrate on financing decisions. As with capital budgeting decisions, the firm seeks to create value with its financing decisions. To do this the firm must find positive NPV financing arrangements. However, financial markets do not provide as many opportunities for positive NPV transactions as do nonfinancial markets. We show that the sources of NPV in financing are taxes, bankruptcy costs, and agency costs.

Chapter 13 introduces the concept of efficient markets, where current market prices reflect available information. We describe several forms of efficiency: the weak form, the semistrong form, and the strong form. The chapter offers a number of important lessons for the corporate financial manager in understanding the logic behind efficient financial markets.

In Chapter 14 we describe the basic types of long-term financing: common stock, preferred stock, and bonds. We then briefly analyze the major trends and patterns of long-term financing.

We consider the firm's overall capital-structure decision in Chapters 15 and 16. In general, a firm can choose any capital structure it desires: common stocks, bonds, preferred stocks, and so on. How should a firm choose its capital structure? Changing the capital structure of the firm changes the way the firm pays out its cash flows. Firms that borrow pay lower taxes than firms that do not. Because of corporate taxes, the value of a firm that borrows may be higher than the value of one that does not. However, with costly bankruptcy, a firm that borrows may have lower value. The combined effects of taxes and bankruptcy costs can produce an optimal capital structure.

Ross-Westerfield-Jaffe: IV. Capital Structure and Introduction

Corporate Finance, Sixth Dividend Policy

Edition

© The McGraw-Hill Companies, 2002

Part IV Capital Structure and Dividend Policy

Chapter 17 discusses capital budgeting for firms with some debt in their capital structures. It extends some of the material of Chapter 12. This chapter presents three alternative valuation methods: the weighted-average-cost-of-capital approach, the flows-to-equity approach, and the adjusted-present-value approach.

We discuss dividend policy in Chapter 18. It seems surprising that much empirical evidence and logic suggest that dividend policy does not matter. There are some good reasons for firms to pay low levels of dividends: lower taxes and costs of issuing new equity. However, there are also some good reasons to pay high levels of dividends: to reduce agency costs and to satisfy low-tax, high-income clienteles.

Ross-Westerfield-Jaffe: I IV. Capital Structure and I 14. Long-Term Financing: I I © The McGraw-Hill

Corporate Finance, Sixth Dividend Policy An Introduction Companies, 2002

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Responses

  • bertha
    Who creates the Capital Structure Policy?
    7 years ago
  • dudo
    Does dividend change capital structure?
    6 years ago

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