Net income approach
Compare and contrast the “net income approach,” “net operating income approach,” and “traditional approach” to the optimal debt-equity mix. Which assumptions do you find reasonable?…
Financial Management
Describe “homemade leverage.”
Homemade leverage is investors’ method of substituting their own borrowing or lending for corporate borrowing. Investors who want more leverage than a company has taken…
What role does each of MM’s assumptions play in their theory of the debt-equity mix?
MM’s key assumptions and the role played by each are: (1) Unlimited borrowing and lending is available to all market participants at one rate of…
Is Professor Miller’s personal tax model relevant in today’s tax environment?
Miller’s personal tax model examined the effect of personal income taxes on the debt-equity mix decision. He observed that personal income taxes in the U.S….
What are the variables that enter compromise theory?
What is the effect of each on the optimal debt-equity mix? In compromise theory, the value of a levered firm equals the value of the…
What is meant by the “pecking order approach”?
The pecking order approach is a sequence of raising financing that many companies seem to follow, even though it ignores the recommendations of the various…
Define the meaning of each letter of “FRICTO,” and give an illustration of each
FRICTO is an acronym summarizing important issues that affect the debt-equity mix decision in practice: (1) F = flexibility -the impact of alternative financing choices…
Why does hedging reduce risk?
Hedging is the balancing of a risky position with an equal and opposite risky position. Effectively, hedging creates a portfolio of risky positions in which…
What is the difference between hedging across the balance sheet and hedging individual cash flows?
The difference is in which risky positions are balanced out. Hedging across the balance sheet matches assets and liabilities by their maturities to ensure that…
What are the four steps in putting working capital on the balance sheet?
he four steps represent a logical way to think about filling out the balance sheet in order to (1) only accept investments with positive NPV,…