Capital structure is the relative proportions of debt, equity and other securities that a firm has outstanding.
Common financing choices are through equity alone and a combination of debt and equity.
Financing a firm with Equity
The Project Cash Flows
Beta is 1
, Total cash flow from project = total
cash flow to equity holders
Cash Flows and Returns for Unlevered Equity
(1400/1000) – 1,
(900/1000)-1.
Financing a firm with Debt and Equity
,Values and Cash Flows for Debt and Equity of the Levered Firm
, The effect of leverage on risk and return
15% discount was for no debt. Greater return/discount needed for debt
Returns to Equity with and without Leverage