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Essay / Research Paper Abstract
This 4 page paper discusses the view that the profitability and survival of a company is dependent to a large extent on its financial or capital structure. The paper uses a range of theorists to examine the view, including Modigliani & Miller and Myers & Majluf. The bibliography cites 8 sources.
Page Count:
4 pages (~225 words per page)
File: TS14_TECSsurviv.rtf
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Unformatted sample text from the term paper:
would be able to increase their potential profitability by lowering their cost of capital and seek to maximise their potential to survive. If there is such as potential optimal level
then it is in the firms advantage to pursue it. The first theorists to look at this were Modigliani and Miller (1958).
This is a seminal paper that argues the capital structure of a firm is irrelevant and that the way a firm is valued and perform and be valued will be
linked to the management general performance and not to the capital structure. The work resulted in three propositions; firstly that average cost
of capital, along with the market value of a firm will be independent of the capital structure (Modigliani and Miller, 1958). Secondly, the expected yield of a stock is equal
to the capitalisation rate with the addition of a premium for the risk that is associated with the leverage ratio (Modigliani and Miller, 1958). The third proposition is that regardless
of the source of financing for the optimal investment policy the marginal cost of capital should be equal to the cost of capital (Modigliani and Miller, 1958). This latter proposition
is defined as the ratio of its expected returns to the market value of all its securities (Modigliani and Miller, 1958). The
theory is an important foundation for later works, but it is also limited, for this to be correct the profitability of the firm, and the way it is valued (which
also reflects the market exceptions of profit in terms of the supply and demand), to have no relationship with the capital structure the market in which it takes place is
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