Capital Structure and Firm Value

15 Pages Posted: 12 Jun 2009

See all articles by Robert M. Conroy

Robert M. Conroy

University of Virginia - Darden School of Business

Abstract

This note explores the interaction between the use of debt and firm value and provides a brief perspective on the use of debt. It also introduces the notions of financial and operating leverage. In addition, it covers the impact of the use of debt in the presence of no taxes, corporate taxes only, and both personal and corporate taxes.

Excerpt

UVA-F-0942

CAPITAL STRUCTURE AND FIRM VALUE

The 1980s were the decade of debt. Numerous articles and commentators have discussed the growing use of debt by American nonfinancial corporations. These companies nearly doubled their debt from 1982 through 1988. Deals such as the $ 11 billion purchase of Kraft by Phillip Morris and the leveraged buyout of RJR Nabisco for $ 17.6 billion, which involved huge amounts of borrowing, focused attention on the issue of debt. As corporate debt became an important issue, we saw the following kinds of headlines:

“Has the Debt Binge Gone too Far?” Fortune, April 25, 1988;

“Learning to Live with Leverage, New Risks, New Rewards--and

Bigger Failures?” Business Week, November 7, 1988.

. . .

Keywords: capital structure, financial policy, leverage, liability management, tax issues, valuation

Suggested Citation

Conroy, Robert M., Capital Structure and Firm Value. Darden Case No. UVA-F-0942, Available at SSRN: https://ssrn.com/abstract=1417863

Robert M. Conroy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

HOME PAGE: http://www.darden.virginia.edu/faculty/conroy.htm

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