Marketed Claims versus Nonmarketed Claims

With our extended pie model, there is an important distinction between claims such as those of stockholders and bondholders, on the one hand, and those of the government and potential litigants in lawsuits on the other. The first set of claims are marketed claims, and the second set are nonmarketed claims. A key difference is that the marketed claims can be bought and sold in financial markets and the nonmarketed claims cannot.

When we speak of the value of the firm, we are generally referring to just the value of the marketed claims, VM, and not the value of the nonmarketed claims, VN. If we write VT for the total value of all the claims against a corporation's cash flows, then:

The essence of our extended pie model is that this total value, VT , of all the claims to the firm's cash flows is unaltered by capital structure. However, the value of the marketed claims, VM, may be affected by changes in the capital structure.

Based on the pie theory, any increase in VM must imply an identical decrease in VN. The optimal capital structure is thus the one that maximizes the value of the marketed claims, or, equivalently, minimizes the value of nonmarketed claims such as taxes and bankruptcy costs.

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