5 - Coursework Example

Download file to see previous pages... The fourth proposition establishes that equity-holders are indifferent about the firm’s financial policy (Gitman, 2009). Given a fixed amount of total capital, the allocation of capital between debt and equity is irrelevant because the weighted average of the two costs of capital to the firm is the same for all possible combinations of the two. In the context of the modern theory of finance, it represents one of the first formal uses of a no arbitrage argument though the “law of one price” is longstanding. It structured the debate on why irrelevance fails around the Theorem’s assumptions: by neutral taxes; by no capital market frictions (i.e., no transaction costs, asset trade restrictions or bankruptcy costs); by symmetric access to credit markets (i.e., firms and investors can borrow or lend at the same rate); and by the firm financial policy reveals no information (Eiteman, 2007). Discuss the different ways in which a corporation can distribute cash to its shareholders. Dividends and stock repurchases are the two major ways that corporations can distribute cash to their shareholders. ...Download file to see next pagesRead More