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Chapter 18

Capital structure

Outcome

By the end of this session you should be able to:

 define, calculate and explain the significance to a company’s financial position
and financial risk of its level of the following ratios:

– operating gearing

– financial gearing

– interest gearing

 define company value

 explain the relationship between company value and cost of capital

 explain the traditional view of capital structure theory

 explain the underlying assumptions of the traditional view of capital structure
theory

 interpret a graph demonstrating the traditional view of capital structure theory

 explain the assumptions of a perfect capital market

 describe the views and assumptions of Miller and Modigliani (M&M) on capital
structure without corporate taxes

 interpret a graph demonstrating the views of M&M on capital structure without
corporate taxes

 describe the views and assumptions of Miller and Modigliani (M&M) on capital
structure with corporate taxes

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