Skip to Main Content
Corporate Finance, 5th Edition
book

Corporate Finance, 5th Edition

by Pierre Vernimmen, Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
December 2017
Intermediate to advanced content levelIntermediate to advanced
1024 pages
32h 22m
English
Wiley
Content preview from Corporate Finance, 5th Edition

Chapter 32 Capital structure and the theory 
of perfect capital markets

Does paradise exist in the world of finance?

The central question of this chapter (and of the following one) is: is there an optimal capital structure? That is to say, is there a “right” combination of equity and debt that allows us to reduce the weighted average cost of capital and therefore to maximise the value of capital employed (enterprise value)?

The reader may be surprised by this question when Chapter 13 showed clearly how return on equity could benefit from the leverage effect. But again we recall that we have now left the world of accounting in order to enter the universe of finance.

Jumping directly to the conclusion, this part of the book could be renamed “the uselessness of the leverage effect in finance”!

Note that we consider the weighted average cost of capital (or cost of capital), denoted k, to be the rate of return required by all the company’s investors either to buy or to hold its securities. It is the company’s cost of financing and the minimum return its investments must generate in the medium term. If not, the company is heading for ruin.

k D is the rate of return required by the lenders of a given company, k E is the cost of equity required by the company’s shareholders, and k is the weighted average rate of the two types of financing, equity and net debt (from now on often referred to simply as debt). The weighting reflects the breakdown of equity and debt in enterprise value. ...

Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.
Start your free trial

You might also like

Corporate Finance For Dummies

Corporate Finance For Dummies

Michael Taillard
Fundamentals of Corporate Finance, 4th Edition

Fundamentals of Corporate Finance, 4th Edition

Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan
Corporate Finance Theory and Practice, Third Edition

Corporate Finance Theory and Practice, Third Edition

Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi
Corporate Finance: A Practical Approach, Second Edition

Corporate Finance: A Practical Approach, Second Edition

CFA Michelle R. Clayman, CFA Martin S. Fridson, CFA George H. Troughton

Publisher Resources

ISBN: 9781119424482Purchase book