Episode Details

In this session, I 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. We will continue with this discussion next week. In class, looking at limits to the approach, and variants.
Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr21/session18slides.pdf
Post class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session18test.pdf
Post class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session18soln.pdf
Spreadsheet for computing optimal ratio: http://www.stern.nyu.edu/~adamodar/pc/capstru.xlsx

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