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1


Windows of Opportunity Theory

1. There is no target leverage ratio
2. A firm’s capital structure is merely an accident of its own history and that of the market.
3. Managers merely behave opportunistically.
4. They are constantly seeking and exploiting mispricing in inefficient capital markets to borrow funds at the lowest cost.

2

1. Detailed Description of Rating System

a. When firms issue their securities the rating agencies provide a public estimate of the rating of the debt.
b. The ratings are an estimate of the default risk on the bonds
c. The three largest Rating Agencies are Moody’s, Standard & Poor’s (S&P) and Fitch.
d. Here AAA (or Aaa) are the least liable to default, while D are the most likely. In fact, a bond rated C or D is probably for a firm currently in bankruptcy

3

a. Investment Grade Bonds

AAA to BBB

4

d. High Yield Bonds or Junk Bonds:

lower than BBB

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Speculative:

BB and B

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Very Poor:

lower ratings

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c. Payout Ratio

c. Payout Ratio = DPS / EPS (% given out in dividends)

8

Plowback Ratio

d. Plowback Ratio = 1-(DPS/EPS) (% retaining)

9

2. Types of Dividends

Regular Cash Dividends
extra cash dividend
special dividend -
Liquidating dividends:
Stock dividends