We started this class by completing the debt trade off, by bringing in agency costs and financial flexibility, and looking at a financing hierarchy, starting with retained earnings as the most preferred and convertible preferred as the least preferred financing for firms. We looked at the Miller Modigliani theorem through the prism of the debt tradeoff and followed up by using the financing hierarchy that companies seem to move down, when they think about raising fresh financing. I then moved on to looking at how the cost of capital can be used to optimize the right mix of debt and equity. In effect, you estimate the costs of debt and equity at different debt ratios, and try to find the mix of debt and equity that minimizes your cost of capital. If you want to try your hand at using the spreadsheet to optimize debt ratio, try the following:
http://www.stern.nyu.edu/~adamodar/pc...
We will continue with this discussion next week. looking at limits to the approach, and variants.
Slides: https://pages.stern.nyu.edu/~adamodar...
Post class test: https://pages.stern.nyu.edu/~adamodar...
Post class test solution: https://pages.stern.nyu.edu/~adamodar...