FAS L5

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• capital structure relative proportions of debt, equity and other securities that a firm has outstanding
• cost of capital risk-free interest rate + risk premium
• unlevered equity finance with equity, there is no debt, the cash flows of x are equal to those of the project
• levered equity finance with debt and equity, equity in a firm that also has debt outstanding
• levered equity price the same as the present value since the total cash flows should equal the cash flow of the project
• the effect of leverage on risk and return leverage increase the risk of the equity of a firm
• risk premium is zero debts return bears no systematic risk
• the law of price leverage will not affect the total value of the firm, it merely changes the allocation of cash flows between debt and equity, without altering the total cash flows of the firm
• perfect capital market investors and firms can trade the same set of securities at competitive market prices equal to the present value of their future cash flows
• homemade leverage when investors use leverage in their portfolios to adjust the leverage choice made by the firm
• market value balance sheet all assets and liabilities of the firm are included, all values are current market values rather than historical costs
• total market value firms securities is equal to the market value of its assets whether the firm is unlettered or levered
• capital budgeting and the weighted average cost of capital unlevered firms, all of the free cash flows generated by its assets are paid out to its equity holders. market value, risk and cost of capital for the firm's assets and its equity
• R:wacc weighted average
• real capital markets one consequence of MM is that dividend policy of a stock should not be connected to the price of the stock

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