Chap 16 Flashcards
Capital Restructuring
Activities that alter the firm existing capital structure
Homemade leverage
The use of personal borrowing to change the amount of financial leverage to which the individual is exposed
M&M Proposition 1
The value of the firm is independant from its capital structure
M&M Proposition 2
A firm’s cost of aquity capital is a positive linear function of its capital structure
Business Risk
The equity risk that comes from the nature of the firm’s operating activity
Financial Risk
The equity risk that comes from the firm financial structure (capital structure) of the firm
Interest Tax shield
The tax saving acheived by a firm from its interest expense
Direct bankruptcy cost
The costs that are directly associated with bankruptcy, such as legal and adnimistrative expenses
Indirect bankruptcy cost
Dificulties of running a business that is experiencing financial distress
Financial distress cost
The direct and indirect cost associated with going bankrupt or experiencing financial distress
Static theory of capital structure
Theory that a firm borrows up to the point that the benefit from an extra $ in debt is exactly equal to the cost that comes from the increased probability of financial distress
Bankruptcy
A legal proceeding for liquidation or reorganization of a business. Also the transfer of some or all of the firm’s assets to its creditors
Liquidation
termination of the firm as a going concern
Reorganization
Financial restructuring of a failing firm to attempt to continue operations as a going concern
