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 33 Capital structure, taxes and organisation theories

There’s no gain without pain

In the previous chapter we saw that the value of a firm is the same whether or not it has taken on debt. True, shareholders will pay less for the shares of a levered company, but they will have to pay back the debt (or buy it, which amounts to the same thing) before obtaining access to the enterprise value. In the end, they will have paid, directly or indirectly, the same amount (value of equity plus repayment of net debt1); that is, the enterprise value.

Now, what about the financial manager who must issue securities to finance the creation of enterprise value? It does not matter whether he issues only shares or a combination of bonds and shares, since again the proceeds will be the same – the enterprise value.

Enterprise value depends on future flows and how the related, non-diversifiable risks are perceived by the market.

But if that is the case, why diversify sources of financing? The preceding theory is certainly elegant, but it cannot fully explain how things actually work in real life.

In this chapter we look at two basic explanations of real-life happenings. First of all, within the same market logic, biases occur which may explain why companies borrow funds, and why they stop at a certain level. The fundamental factors from which these biases spring are taxes and financial distress costs . Their joint analysis will give birth to the “trade-off model.”

There are features of ...

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