Day: February 6, 2022

The pecking order theory implies that firms prefer to finance internally and if external financing is required, they will tend to use the safest securities first. Debt tends to be the first security issued and external equity the last resort. Read More …

The theory contends that signal provided by capital structure changes are credible in providing the trend of future cash flows. Actions that increase have been associated with positive equity returns while actions that decrease leverage have been assonated with negative Read More …

The theory posts that equity holders and debt holders incur costs associated with monitoring management to ensure that it behaves in ways consistent with the firm’s contractual agreement. Regardless of who makes the monitoring express the cost is ultimately borne Read More …

It is difficult believe that a firm should have 100% debt because of tax advantage. Why don’t firm in practice borrow 100% or what is the offsetting disadvantage of debt? The offsetting disadvantage is grouped under the term financial distress. Read More …

The arbitrage process is the behavioral foundation for the M-M thesis. The shortcoming of this thesis lie in the assumption of perfect capital market in which arbitrage may fail to work and may give rise to discrepancy between the market Read More …

The Modigliani-Miller (M-M) posits that in the absence of taxes a firm’s market value and the cost of capital remain invariant to the structures changes. Assumptions The M-M hypothesis can be explained in terms of their propositions I and II Read More …

The validity of the traditional position has been questioned on the ground that the market value of the firm depends upon its net operating income and risk attached to it. The form of financing can neither change the net operating Read More …

Capital of a firm is a mix (or proportion) of a firm permanent long term financing representing by debt, preferred stock and common stock Given that is firm has a certain structure of assets, which offers net operating earnings of Read More …

Bonus shares can be issued only out of free reserves built out of the genuine  share premium collected in cash only Reasons for Issuing Bonus Shares The bonus issue tends to bring the market price per share within a more Read More …

While formulating its dividend policy a firm should bear in mind the following considerations:  Investment decisions have the greatest impact on value creation. External equity is more expensive than internal equity (retained earnings) because issue costs and underpricing. Most promoters Read More …