Capital Structure, Mergers, and Acquisitions: Key Concepts

Posted by on Feb 11, 2025 in Finance and Accounting | 0 comments

Chapter 17: Capital Structure: Limits to Debt

Signaling

Investors view debt as a signal of firm value:

  • If a firm has a high level of debt, investors will think that the firm has high anticipated profits.
  • If a firm has a low level of debt, investors will think that the firm has low anticipated profits.

The firm’s capital structure optimization: Marginal benefit of debt = Marginal cost of debt.

Firms with high anticipated profits have lower expected bankruptcy costs; hence, they want to have more debt.

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