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Free Cash Flows Theory - Case Study Example

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This paper "Free Cash Flows Theory" discusses the capital structure in general and how it is related to increasing the firm's value. This includes a discussion of various literature that are included in Myers' article, the trade-off theory, the pecking order theory and the free cash flows theory…
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Free Cash Flows Theory
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Download file to see previous pages These are not hard and fast rules in determining the capital structure which should best affect a firms value. These theories lay down the benefits and the costs when a firm chooses what it sees as an adequate mix to maximise the shareholders value.

One of the implications where this research can lead include the possibility of the effectiveness in maximising shareholder value by employing two or more theories in capital structure decisions. Because these theories are more conditional by nature, probing which combinations when used for capital structure decisions are more effective in arriving at the goal of maximising firm value can be another subject for further research.
The role of capital structure in increasing the firms value has long been debated in the field of financial economics. Stewart Myers, in his article in the Journal of Economic Perspectives entitled “Capital Structure,” shares his insights about the role of capital structure in maximising shareholder value as well as the various theories that support it. The article is a survey of literature on capital structure; however, it is not another research to test the empirical evidence of the various theories. However, it is the objective of the article to try to find some insights through existing works of literature on the common question, “what financial managers are really maximising” when they deal with capital structure decisions.

In his article, Myers start the survey by looking at Modigliani and Miller's proposition—the debt irrelevance proposition which states that debt policy is irrelevant when it comes to maximising the value of the firm, because no matter how financing is sliced, in a perfect market where it is complete, without any imperfections and externalities, the market value of the firm will remain constant. ...Download file to see next pagesRead More
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