Value – Maximizing Capital Structure

The preceding discussion of the impact of taxes,

bankruptcy cost, and agency cost indicates that the
market value of a levered firm can be presented by
the following equation.
Market Value of Levered Firm =
( Market Value of Unlevered Firm) +
( Present Value of Tax Shield) –
( Present Value of Financial Distress Cost) –
( Present Value of Agency Cost)
FIGURE 13.4
The Cost of Capital
and
The Optional Capital
Structure
FIGURE 13.5
Other Consideration in the
Capital Structure
Decisions:
1.) PERSONAL TAX EFFECT
- the absence of financial distress cost and
agency costs, the firm should attempt to minimize
its taxes by employing the maximum amount of
debt.
 2.) INDUSTRY EFFECTS
- the studies of industry effects in capital
structure tend to conduct that there is an optimal
capital structure for individual firms.
3.) SIGNALING EFFECTS
- an access to relevant information concerning a
firms future earning prospects.
3.A.) ASYMMETRIC INFORMATION
- an information about the expected future
earnings and cash flows of the firm that is not
available to outside investors.
4.) MANAGERIAL PREFERENCE EFFECTS:
• The Pecking Order Theory

- a changes in company’s capital structure when

an imbalance between internal cash flows, net of cash
dividend payment, and acceptable investment
opportunities occurs.
4.A.) FINANCIAL SLACK
- a build up in situation where highly profitable
firms with limited needs for investment funds will
tend to have lower debt ratio.
Factors to Determine the Specific Capital
Structure:
1. Exchange Rate Risk
2. Local Industry Standards
3. Host Country Requirements
4. Risk of Expropriation
5. Availability of Special, Low Cost Financing
in a Host Country
REPORTER: JEZZAVEL CADAVOS-BARRO