2 nd Midterm Review Dr. Bader Alhashel

Chapter 14 Capital Structure & Leverage Book, Market, or “Target” Weights? – Capital – Capital structure – Optimal capital structure Business & Financial Risk – Factors that affect business risk – Operating leverage – Operating break-even – Financial leverage

Chapter 14 Capital Structure & Leverage Determining the Optimal Capital Structure – WACC & Capital Structure Changes – The Hamada equation – Unlevered Beta – The optimal capital structure

Chapter 14 Capital Structure & Leverage Capital structure theory – Modigliani & Miller Irrelevance Theory – The effect of taxes – The effect of potential bankruptcy – Trade-off theory – Signaling theory Asymmetric information Signal Reserve borrowing capacity – Using debt financing to constrain managers – Pecking order hypothesis

Chapter 14 Capital Structure & Leverage Degree of Leverage – Degree of operating leverage – Degree of financial leverage – Degree of total leverage

Chapter 15 Distributions to Shareholders Dividends versus capital gains – Dividend irrelevance theory – Reasons some investors prefer dividends Bird-in-the-hand fallacy – Reasons some investors prefer capital gains Other dividend policy issues – Signaling hypothesis – Clientele effect Catering theory

Chapter 15 Distributions to Shareholders Establishing the dividend policy – The residual dividend model – Payment procedures Stock dividends & stock splits – Effect of stock prices Stock repurchases – The effects of stock repurchases – Advantages of repurchases – Disadvantages of repurchases – Conclusions on stock repurchases