Chapter 17: Capital Structure: Limits to Debt
Investors view debt as a signal of firm value:
- If a firm has high level of debt, investors will think that the firm has high anticipated profits.
- If a firm has low level of debt, investors will think that the firm has low anticipated profits.
* The firm’s capital structure optimization: Marginal benefit of debt = Marginal cost of debt.
*Firms with high anticipated profits have lower expected bankruptcy cost; hence want to have more debt.
*If Managers want to fool investors:
- the more valuable firms will want to issue more debt than less valuable firms. The cost of extra debt increases with the amount of debt will prevent less valuable firms from issuing more debt than the more... Continuar leyendo "Corporate Finance sheet" »