Showing papers on "Capital structure published in 1969"

The capital structure of a firm

Abstract: Summary The earnings of a firm are represented by a discrete stochastic process, in which the terms can take negative values. Earnings can be added to the firm's working capital, or paid out as dividends. If the firm has debts, a part of the earnings must be set aside to service the debt. It is assumed that the firm is ruined and has to cease its operations if the working capital becomes negative. The payments from the firm, to shareholders and creditors can be represented by two discrete stochastic processes. According to a theorem by Modigliani and Miller the sum of the market values of these two payment sequences should be independent of the equity-debt ratio. It is shown that this cannot be true under any reasonable assumptions about the market. The results are illustrated by a simple numerical example.

A Test of the Equivalent-Risk Class Hypothesis

Abstract: Many students of business finance subsume the risks associated with a firm's income stream under two general cognomens, namely, “business risk” and “financial risk.”1 The degree of business risk associated with a firm's income stream is considered to be a function of all determinants of risk except those that relate to the means by which a firm's operations are financed (i.e., the nature of a firm's capital structure). In general, business risk is determined by a firm's asset structure, the purposes for which a firm's assets are used, and the efficiency and effectiveness with which a firm's assets are utilized. The determinants of business risk include the competitive position of a firm, the nature of a firm's operating expenses, the intensity of demand for a firm's products, and a firm's managerial resources, inter alia. A measurement of the variability of net operating income (i.e., earnings before interest expenses and income taxes) is usually employed as a surrogate of business risk.

Non‐convertible preferred stock as a financing instrument 1950–1965: comment

Abstract: IN A RECENT STUDY of nonconvertible preferred stock financing during the period 1950-1965, Professors Donald Fischer and Glenn Wilt find that there are three primary reasons for issuing nonconvertible preferred stock These reasons, listed according to their degree of importance, are as follows: (1) to provide secondary financial leverage, (2) to improve the borrowing base, and (3) to maintain balanced capital structure They state that the first reason is of primary importance to utilities because it enables them to increase the rate of return to common equity which is necessary to compete successfully with unregulated companies for common equity capital They also report that the third reason is mentioned only by financial managers of utility corporations Their study is based on correspondence with forty corporate financial managers, who are responsible for more than seventy issues, and on interviews and correspondence with some investment bankers As to the future of nonconvertible preferred stock, they suggest that a change in corporate income tax to allow the tax-deductibility of preferred dividends might result in a dramatic increase in the use of preferred stock financing' A study based on a larger sample shows different priorities of the reasons for issuing nonconvertible preferred stocks2 The findings, classified by industry and reason, are shown in the following table The table shows that the chief reason for issuing nonconvertible preferred stocks is to maintain balanced capital structure, in contrast to the report of Professors Fischer and Wilt, who rank this factor third in priority The findings in the larger sample seems in accord with the goal of an optimum financial plan-a plan that reflects sound financial proportions and minimizes the cost of capital to the particular corporation under study The coauthors state that this reason is mentioned only by managers of utility companies Although it is most important to utilities because,