14-1

Capital Structure and Leverage

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Optimal capital structure : a firm’s capital structure that maximizes its firm value (or Minimizes the WACC)

Target capital structure : the mix of debt, preferred stock and common equity with which the firm plans to raise capital

Capital Structure

14-3

What is financial leverage? Financial risk?

Financial risk is the additional risk concentrated on common stockholders as a result of financial leverage. Financial leverage is the extent to which

fixed-income securities (debts) are used in a firm’s capital structure.

As the firm borrows more money, the firm increases its financial risk causing the firm’s bond rating to decrease, and its cost of debt to increase.

14-4

Capital Structure Theory

MM (’58) theory (Modigliani and Miller) Firm’s value unaffected by its capital structure (CS

irrelevant)

=> 자본구조는 투자 결과인 현금흐름의 배분비율(주주

vs. 채권자)에만 영향, 현금흐름 크기와 위험에 영향을 미

치지 않아 자본구조와 기업가치 무관

Assumptions: No brokerage costs No taxes No bankruptcy costs The same borrowing and lending rate Symmetric information EBIT is not affected by the use of debt.

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Capital Structure Theory (cont’d)

MM (’63) theory (corporate tax effect)

D/A

FV

VU VU

VL

Value added by debt tax shelter benefits(=TcD)

Relaxed no corporate tax assumption

Leads to an optimal capital structure with 100 percent debt because of interest payments’ tax deductibility

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Capital Structure Theory (cont’d)

Miller (’77) theory (personal tax added)

• (1-Tc)(1-Ts)>(1-TB): D => firm value (L)

• (1-Tc)(1-Ts)<(1-TB): D => firm value (L)

• (1-Tc)(1-Ts)=(1-TB) : MM(’58)

• Ts=TB : MM(’63)

※ Ts : 주식투자소득에 대한 개인소득세율, TB : 채권투자소

득에 대한 개인소득세율

DT

TTVV

B

Sc

uL

)1(

)1)(1(1

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CS Theory : potential bankruptcy ㅇ 파산(Bankruptcy): 청산을 통한 기업해산; 일반적으로 채무에 대한

이자 및 원금의 지급불능상태(insolvency) 의미

(1) 기술적 지급불능(technical insolvency) : 일시적 유동성부족

(2) 실질적 지급불능(real insolvency, economic insolvency)

ㅇ 파산비용(Bankruptcy cost): 재무적곤경(financial distress)에 빠질

가능성과 실제 접했을 경우 예상되는 비용에 의해 결정

* 부채=>재무적곤경에 빠질 가능성=>파산비용=>기업가치영향

*재무적곤경: 채권자에 대한 지급의무를 이행하지 못하는 상황

(1)직접파산비용: 파산처리과정에서 발생하는 각종수수료, 법정비용

(2)간접파산비용: 파산가능성으로 인해 지불해야 하는 비용으로

기업이미지훼손에 따른 영업손실, 신용하락에 따른 기회비용 등

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CS Theory : potential bankruptcy

Firm value

VU

VL* (Max.

FV)

VL=Vu + corp. tax shield

Value reduced by bankruptcy-related costs

D/A* D/A

VL=Vu+CTS–bankruptcy-

related costs

Value added by debt tax shelter benefits

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CS Theory : signaling theory

ㅇ Signaling effect : 정보 비대칭성(information asymmetry)으로 인한 기업의 정보 전달 누락 가능성 => 자본조달정책/ 배당정책을 이용, 시장에 정보 전달 [also called information effect]

- a firm with unfavorable prospects wants to finance with stock to share the losses with new investors, whereas a firm with favorable prospects with debt not to share the profits.

- Need to maintain a reserve borrowing capacity for future good investment opportunity => Firms use more equity and less debt than is suggested by optimal capital structure in normal times.

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CS Theory : Agency theory ㅇ 대리인문제(agency problem): 권한 위임자 (principal)와 대리인

(agent)간 발생하는 갈등 문제 => 대리인비용(agency costs)

(1) 주주와 경영자간(자기자본대리인문제): 특권적소비,경영자 태만

(2) 부채의 대리인문제: over (under)-investment

대리인비용

총대리인비용

(D/A)* 부채비율(D/A)

부채의 대리인비용

자기자본 대리인비용

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Factors for capital structure dec.

1. Sales stability

2. Operating leverage

3. Corporate tax rate

4. Management attitudes

5. Lender/rating agency attitudes

6. Effects of financing on control

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Conclusions on Capital Structure

Wide variations in the use of financial leverage both across industries and among the individual firms in the same industry

Capital structure decisions have a large judgmental content.

Treat as a range rather then as a precise point