Corporate finance - Assignment Example

Comments (0) Cite this document
Summary
Corporate finance Table of Contents Capital structure and firm value 3 Miller & Modigliani capital structure irrelevance proposition 3 MM Proposition without taxes 4 MM Proposition with taxes 7 Practical relevance of MM proposition 9 Propositions on dividend policy 9 Implications of MM dividend irrelevance proposition 10 Limitations of the net present value method of investment evaluation 13 Real Options and capital budgeting 14 Challenges associated with real options in capital budgeting- 15 Reference 17 Part 1- Capital structure and firm value The firm value is defined as the sum of value of its debt and the value of its equity…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97% of users find it useful
Corporate finance
Read TextPreview

Extract of sample
"Corporate finance"

Download file to see previous pages Miller & Modigliani capital structure irrelevance proposition In the year 1958 Franco Modigliani and Merton Miller highlighted that in “perfect capital markets” the capital structure does not have any influence on the value of the firm rendering it irrelevant. The perfect capital markets are not characterised by any market frictions like trading costs, taxes and the information is easily transmitted between the investors and the managers. M&M made a clear distinction between the financial risk and business risk faced by a firm. While the financial risk refers to the choice of risk distribution between the bondholders and shareholders, the business risk refers to the uncertainty of cash flows of the business. It has been pointed out by Miller and Modigliani that changes in leverage does not cast any significant influence on the cash flows generated by the business. Therefore changes in leverage cannot alter the value of the firm. ...
The firms as well as individuals can borrow or lend at the risk-free interest rate. The firms employ risky equity and risk-free debt. There exist only corporate taxes i.e. absence of personal income taxes or wealth taxes. They assumed perpetuity of cash flows i.e. assuming the growth rate to be zero (Lee, et al., 2009, p.202). As per M&M model the value of levered firm (VL) is equal to the value of unlevered firm (VU). Suppose there are two companies- Company 1 and Company2. It is assumed that the two companies have identical cash flows and belong to same risk profile. The difference between the two companies is with respect to financing. M&M state that the market value of the two companies is same. Suppose the pay-off of Company 1 in good state is 160 and in bad state is 50. This company is financed only by the equity mode of financing. Similarly the payoff of Company 2 is 160 in good state and 50 in bad state. It is financed by the combination of debt and equity. Suppose the total debt of Company 2 is $60 and its market value is $50; the market value of its equity is $50. Then the value of the Company 2 is- VL = Value of its equity + Value of debt = 50+50 =100 Now if the value of Company 1 is different from Company 2 say 103. Then an arbitrage strategy can be created- An investor can sell Company 1 at 103. He can buy the equity of Company 2 at $50 and debt at $50. The net cash flow is- = 103-100 =3 This process will continue until the Value of Company 1 is equal to Company 2 (Banal-Estanol , 2010). The increase in leverage component raises the risk and return of the shareholders. This can be stated as- RE = RO + (B/S)(RO – RD) RE is the return on levered equity RO is return on unlevered equity B is the debt value S is the ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Corporate finance Assignment Example | Topics and Well Written Essays - 3000 words”, n.d.)
Retrieved from https://studentshare.org/family-consumer-science/1416455-corporate-finance
(Corporate Finance Assignment Example | Topics and Well Written Essays - 3000 Words)
https://studentshare.org/family-consumer-science/1416455-corporate-finance.
“Corporate Finance Assignment Example | Topics and Well Written Essays - 3000 Words”, n.d. https://studentshare.org/family-consumer-science/1416455-corporate-finance.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document
CHECK THESE SAMPLES - THEY ALSO FIT YOUR TOPIC
Corporate finance
...? Corporate Finance Introduction The significance of natural gas is growing everyday as energy needs in industrial, transportation, and technological sectors are on the rise. Although other renewable energies like solar power and wind power have been in use, individuals and business organizations still depend more on natural gas due to its easy availability and increased efficiency. In addition, features like easy availability, broader applicability, high safety, reduced noise pollution, and renewability of natural gas improve the scope of natural gas industry. Clean Energy Fuels Corp. (CLNE) is the North America’s largest provider of transportation natural gas and the organization has currently spread...
8 Pages(2000 words)Research Paper
Corporate finance
...TOPIC: CORPORATE FINANCE (a) Introduction: Our are the most treasured assets we have, a such we treat them with utmost care and maximum attention in given to them for the purpose of transparency, progress and the most of which is –satisfaction of our clients. This is most serious because they are our future and we owe them satisfaction with perfection. As you are aware we use fundamental analysis and valuation methods to select equities for you as a guide for portfolio investments. It is in this light that our bank has deem it fit to present to you a fundamental analysis and the valuation of one of the FSTE 100 Companies, which is the “British Airways”. This analysis will include; A fundamental analysis...
17 Pages(4250 words)Essay
Corporate finance
...Corporate Finance Issues Capital Structure and Dividend Decisions “It is ironic that the ic theory of corporate finance concludes that capital structure and dividend decisions do not affect the value of a listed company”. Critically evaluate this theory and discuss competing theories that may shed light on the gearing and dividend decisions of listed companies. (Weight 30%) Gearing and Dividend Policies of Vodafone plc Using publicly available information, critically evaluate the gearing and dividend policy of one FTSE 100 company. (Weight 30%) Corporate Governance “If managers and directors of listed companies choose to ignore the interests of...
18 Pages(4500 words)Essay
Corporate finance
...Corporate Finance Introduction United Metal is considering an alternative proposal of buying components from Amalgamated Components. These componentsare at present being manufactured in house by United Metals. The proposal assumes a saving of $96000 during a period of eight years, which is remaining useful life of machinery purchased by United Metals a year ago the purpose of manufacturing of such components. An effort has been made in this write up to evaluate both the in-house manufacturing and buying proposals in order to arrive at proper recommendations to be made to United Metals. a) Critical evaluation of arguments of purchasing and production managers Purchasing Manger’s arguments 1. The argument of the purchasing manger... Finance...
5 Pages(1250 words)Essay
CORPORATE FINANCE
...Business Finance Article - How to Evaluate Your Business & Improve Your Bottom Line During Recession by Tony Massaro In the current economic condition, with the high recession that is being faced globally, Massaro has taken an initiative to provide businesses with a solution and some recommendations to be able to cope up with the recession and yet be successful. This article talks about the some extremely essential questions which need to be answered by business to ensure that the business is moving in the right direction. In the current scenario, it is a necessity for businesses to evaluate themselves and make necessary changes to be able to survive in the markets. Massaro has also provided clear reasoning to the...
2 Pages(500 words)Essay
Corporate finance
...of irrational behavior by the economic agents which resulted into the greater impact on the economy in the form of current financial crisis.(Folsom,2009) One of the arguments, put forward by Jeremy J Siegel, do however, indicates that the efficient market hypothesis may not be entirely responsible for the current financial crisis. This analysis is based on the studies conducted on the prices of real estate for the past 61 years up to 2006 indicating that the overall variability in the prices of the real estate properties were only less than 3% which basically allowed credit rating agencies as well as finance managers to lower down the risk premium to be obtained on the subprime borrowers. Further, based on this...
8 Pages(2000 words)Essay
Corporate Finance
...Impact of the World’s Flatness on Corporate Finance of the of the Impact of the World’s Flatness on Corporate Finance Introduction I’m sure we’ve all heard of the popular refrain, ‘Money makes the world go round.’ In fact, the 21st century has been distinguished from all of previous history by the lack of borders, open and worldwide employment opportunities, the transfer of technology and education at a breakneck speed. The world is truly becoming more of a global village every day. We cannot be separated from what is happening all across the world, as recent events unfold right across our TV screens 24/7 courtesy of satellite TV and the plethora of channels that work...
1 Pages(250 words)Essay
Corporate finance
... markets, Journal of Financial Economics, 47 (1998) pp. 243-277 Burch Jr., J. C. and Foerster, B. S., 2011. Capital Markets Handbook, Aspen Publishers. Fama, E. F., 1991. Efficient Capital Markets: II, Journal of Finance, Vol. 46, Iss: 5, Dec. 1991, pp. 1575-1617. FSA, 2012. What we do: who we regulate, [online] Available at: [Accessed 9 March 2013]. [Accessed 9 March 2013]. Gomme, P., 2005. Why Policymakers Might Care about Stock Market Bubbles, Federal Reserve Bank of Cleveland, [online] Available at: Healy, P. M. and Palepu, K. G., 2001. Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical... disclosure literature, Journal of Accounting and Economics 31 (2001) 405–440. Honohan, P., 1995....
11 Pages(2750 words)Assignment
Corporate finance
... Corporate Finance In the first scenario, Mark needs to be overhauled without incorporating a brand new control system. The revenue generated is $1.4 million after the plane is operational and this is after one year. Therefore, no revenue will be earned for the first year. Thereafter the revenue earned will be increased with inflation of 2.5%. Revenue for 2nd year = Revenue for 3rd year= Consecutively, the revenue for the other years is calculated similarly for 12 years as shown in Table 2. The total operating cost is $1,181,000. Similarly, the operating cost for the first year is 0 since the plane is not operational. These costs also increase with inflation. Operational cost for the 2nd year = Operational cost for 3rd year... Corporate...
3 Pages(750 words)Essay
Corporate finance
...Corporate finance Contents Contents 2 Introduction 3 Main body 3 Efficiency of financial market 3 Efficient-market hypothesis 3 Random Walk Hypothesis 4 Possibilities of future bubbles and predictability 5 Conclusion 7 References 8 8 Introduction The concept of efficient market hypothesis came in 1960’s when Eugene Fama introduced this theory. According to this hypothesis, beating the market is not possible as prices are already included and talks about all relevant information. The theory is not at all free from controversies. The hypothesis also tells that buying and selling of securities is all about of chances and there is no scope of skills. Recently the global economy has gone through a very...
6 Pages(1500 words)Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Let us find you another Assignment on topic Corporate finance for FREE!
logo footer
Contact us:
+16312120006
Contact Us Now
FREE Mobile Apps:
  • StudentShare App Store
  • StudentShare Google play
  • About StudentShare
  • Testimonials
  • FAQ
  • Blog
  • Free Essays
  • New Essays
  • Essays
  • Miscellaneous
  • The Newest Essay Topics
  • Index samples by all dates
Join us:
Contact Us