The weighted average cost of capital (WACC) is the marginal cost of raising additional capital and is affected by the costs of capital and the proportion of each source of capital

The market valie of a company is not affected by the capital structure of the company

Based on the assumptions that there are no taxes, costs of financial distress, or agency costs, so investors would value firma with the same cash flows as the same, regardless of how the firms are financed

The cost of equity is a linear function of the company's debt/equity ratio

Because creditors have a claim to income and assets that has preference over equity, the cost of debt will be more than the cost of equity

The WACC is constant because as more of the cheaper source of capital is used (that is, debt), the cost of equity increases

Costs of financial distress are costs associated with a company that is having easy meeting its obligations

There is an optimal capital structure at which the value of the firm is maximized, and the cost of capital is minimized

Agency costs are the costs associated with the seperation of owners and management

Agency costs increase the cost of equity and reduce the value of the firm

The higher the use of debt relative to equity, the lesser the monitoring of the firm and, therefore, the lower the cost of equity

The pecking order theory argues that the capital structure decision is affected by management's choice of a source of capital that gives higher priority to sources that reveal the least amount of information

Because we understand the business model of banks, we know that even though profitable, they do not take advantage. The need to sell quickly the car so often they lower the price, not increase it

Companies do not consider the debt ratings in maling capital structure decisions because the cost of debt is affected by the rating

Country-specific factors affect a company's choice of capital structure and the maturity structure within the capital structure

Because debt has a higher cost that equity, it is natural that firms want to utilize this more than the equity

The lower the downpayment, the greater the probability of approval but borrowers still fail to complete the payment dut to "financial distress". Loans put a stress on your cash flow

A car is not an investment for a finance student as it depreciates, not appreciate. For this, then, it is better to buy a repossessed one but at a much lower price without sacrificing quality too much

When banks approve a loan, they require that the borrowers put in some form of equity after they approve the loan

The assumption of their model (MM) are unrealistic, but they help us work through the effects of the capital structure decision

S1: Investors have homogenous expectations regarding future cash flows

S2: Bonds and stocks trade in perfect markets

When taxes are introduced (specifically, the tax deductibility of interest by the firm), the value of the firm is enhanced by the tax shield provided by this interest deduction. The tax shield:

S1: Lower the cost of debt

S2: Lowers the WACC as more debt is used

Costs of financial distress include the following

S1: Opportunity cost of making optimal decisions

S2: Inability to negotiate short-term supply contracts

The expected cost of financial distress increases as the relative use of debt financing increases

S1: This expected cost added to the value of the firm, offsetting, in part, the benefit from interest deductibility

S2: The expected cost of distress will not affect the cost of debt and equity

Asymmetric information is the situation in which different parties have different information

S1: In a corporation, managers will have a better information set than investors

S2: The degree of asymmetric information differs among companies and inductries

We cannot determine the optimal capital structure for a given company, but we know that it depends on the following:

S1: the business risk of the company

S2: the tax situation of the company

A company's capital structure may be different from its target capital structure because of the following:

S1: market values of outstanding issues is fixed

S2: market conditions that are favorable to one type of security over another

Analysts consider a company's capital structure

S1: compared with competitors with different business risk

S2: considering the company's corporate governance

Types of factors to consider in leverage in an international setting:

S1: institutional and legal environments

S2: financial markets and banking sector

Development of the theory of capital structure, beginning with the capital structure theory of Miller and Modigliani:

S1: benefit from tax deductibility of interest

S2: capital structure irrelevance