1. Finanças Nov 28

2. Topics covered  Agency cost of equity  Pecking order theory  MM model with personal taxes  How firms construct financial structure

3. Agency Cost of Equity  Agency cost of equity is caused by  Shirking: If the manager is one of the owners than if he is just an employee If the manager owns a large proportion of the firm than if he only owns a small percentage  Perquisite If the manager owns a smaller proportion of the firm  Overinvestment: If the manager owns less of the firm

4. Reducing Agency Cost of Equity  Free cash flow hypothesis  Dividend payouts  Debt

5. The Pecking-Order Theory  Asymmetric information  The Pecking Order:

6. The Pecking-Order Theory vs. the Trade-off Theory Pecking-Order Theory Trade-off Theory Target D/E ratio Debt as a signal of the firm Financial slack

7. Personal Taxes: The MM Model  The MM Model shows that the value of a levered firm can be expressed in terms of an unlevered firm as:

8. Personal Taxes: The MM Model  The derivation:  Shareholders in a levered firm receive  Bondholders receive  Total cashflow to all stakeholders

9. Personal Taxes: The Miller Model (cont.) The total cash flow to all stakeholders in the levered firm is:

10. Effect of Financial Leverage on Firm Value with Both Corporate and Personal Taxes Debt (B) Value of firm (V) VUVU B T TT VV B SC UL           1 )1()1( 1

11. Integration of Personal and Corporate Tax Effects and Financial Distress Costs and Agency Costs Debt (B) Value of firm (V) 0

12. How Firms Establish Capital Structure  Most Corporations  Changes in Financial Leverage Affect Firm Value.  There are Differences in Capital Structure Across Industries.  There is evidence that firms behave as if they had a target Debt to Equity ratio.

13. Factors in Target D/E Ratio  Taxes  Types of Assets  Uncertainty of Operating Income  Pecking Order and Financial Slack