Topic 2: Valuing firms and the market for equities The influence of a firm’s debt-to-equity ratio on its value and required rate of return (cost of capital)

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Presentation transcript:

Topic 2: Valuing firms and the market for equities The influence of a firm’s debt-to-equity ratio on its value and required rate of return (cost of capital) Market efficiency and predictability “Anomalies” and “behavioural theories”

Leverage of firms and returns on equity and debt

Trad view of the cost of capital

(Example from Brealey and Myers)

MM Prop II MM Prop I

MM view of the cost of capital

MM view of the cost of capital – with risk of default