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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”
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Leverage of firms and returns on equity and debt
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Trad view of the cost of capital
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(Example from Brealey and Myers)
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MM Prop II MM Prop I
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MM view of the cost of capital
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MM view of the cost of capital – with risk of default
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