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Chapter 17:   Capital Structure Determination

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1. The key issue in the whole capital structure discussion is whether a firm can affect its total valuation and its cost of capital by changing its financing mix.

2. According to the NOI approach to valuation, the total value of the firm is not affected by changes in its capital structure.

3. According to the traditional approach, an optimal capital structure would probably not be a financing mix consisting entirely of debt.

4. With corporate taxes, the value of the tax shield is the value of a leveraged firm less its value as an unleveraged firm.

5. According to the NOI approach, a firm can increase its total valuation and lower its cost of capital as it increases the use of financial leverage.

6. With corporate taxes, the use of any financial leverage will have an unfavorable impact on a company's total valuation.

7. The traditional approach to capital structure implies that beyond some point, ke rises at an increasing rate with leverage.

8. The lower a firm's cost of capital, ko, the higher the total valuation of the firm.

9. Financial signaling occurs when capital structure changes convey information to security holders.

10. In a world of taxes, bankruptcy costs, and other market imperfections, there is likely to be an optimal capital structure for the firm.

11. Financial timing simply means the extent to which today's financing decision will keep open future financing options.

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