2 nd Midterm Review

1. 2nd Midterm Review Dr. Bader Alhashel

2. 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

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

4. 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

5. Chapter 14 Capital Structure & Leverage • Degree of Leverage • Degree of operating leverage • Degree of financial leverage • Degree of total leverage

6. 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

7. 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