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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.1
Relationship between risk and return
Return
(%)
Risk
Risk
premium
Risk-free
rate
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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.2
The traditional view of the relationship between
levels of borrowing and expected returns
Costofc
apital
Level of borrowing
Optimal level of
borrowing (i.e. point at
which overall cost of
capital is minimised)
Cost of loan
capital
Overall cost
of capital
Cost ofordinary share
capital
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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.3
Relationship between the level of borrowing, the cost
of capital and business value: the traditional view
Costo
fcapital
Level of borrowing
Valueofthebusiness
Level of borrowing
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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.4
The MM view of the relationship between levels of
borrowing and expected returns
Cost ofcapital
Level of borrowing
Cost of
loan capital
Overall
cost of
capital
Cost of
ordinary
share capital
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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.5
Relationship between the level of borrowing, the cost
of capital and business value: the MM view
Costofcapital
Level of borrowing
Valueoft
hebusiness
Level of borrowing
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Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.6
The capital structure debate
MM analysis b ased on the
fol low ing restr ict iv eassumpt ions:
No bankruptcy cost
Businesses exist with
identical operating risks
Perfect capital markets
No taxation
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8/10/2019 Atrill Capital Structure Slides
7/8Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.7
The MM view of the relationship between levels of
borrowing and expected returns (including tax effects)
Cost of
capital
Level of borrowing
Cost of
loan
capital
Overall
cost of
capital
Cost of
ordinary
share
capital
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8/10/2019 Atrill Capital Structure Slides
8/8Peter Atrill, Financial Management for Decision Makers, 6th
Edition, Pearson Education Limited 2012
Slide 8.8
Cost
ofcapital
Level of borrowing
Valueofth
ebusiness
Level of borrowing
Relationship between the level of borrowing, the cost of
capital and business value: the MM view
(including tax effects)
