Corporate finance Essay Example | Topics and Well Written Essays - 4500 words

Corporate finance - Essay ExampleIn tradeoff theory, the search is for an optimum capital structure. The tradeoff is amidst the amuse tax shield, bankruptcy be and agency costs. The watertight would seek the optimum debt ratio that maximises the value of the firm. It therefore balances the marginal present value of interest tax shields against bankruptcy costs and agency costs. The theory therefore predicts the mean reversion of the echt debt ratio towards a target or optimum and also predicts a cross-sectional relation between average debt-ratios and asset risk, profitability, tax status and asset type.In pecking order theory, there is no best debt ratio. Due to asymmetric information and signaling problems associated with issuing equity, financing policies follow a hierarchy, with preference for essential over external financing and for debt over equity. The debt ratio is therefore a cumulative result of hierarchical financing over time.2. Managers are prohibited from tradin g in the shares of the firm. This prevents them from going against the interests of the firm, example short-selling the shares before announcing fully grown news about the firm even though the firm is doing well.3. 3. Investors use the face value of debt held by the company to tell whether the firm is roaring (type A) or unsuccessful (type B).4. By changing the capital structure, the firm alters the perceived market value of the firm even if the true value of the firm remains the same. 1 period interest rate rt = 0 t=1V0 V1Market perceptual experience Truth is revealedManagers compensation, M, paid out at the end of the period t=1 V1 if V1 DM = (1 + r)0V0 + 1 V1 - C if V1 0, 1 positive weights of the value of the firmr one period interest rateV0, V1 value of the firm at t=0 and t=1VA value of successful type firm at t = 1VB