This paper discusses capital structure and risk and looks at a model regarding capital known as the 'law of conservation of value'.
Written in 2005; 675 words; 3 sources; $ 26.95
Paper Summary:
This paper deals with the law of conservation of value and stock evaluation. In addition, the writer discusses the difference of capital investment project analysis, NPV, IRR and payback period. The writer explains that the positive NPV is used to determine the choice between projects and whether a company will choose one project over another. In addition to this, the writer points out that a company needs to be aware of company and market elements before making crucial decisions.
From the Paper:
"The capital structure of a company determines the amount of risk the company assumes in liabilities or leverage. The more debt a company assumes will alter the amount of risk its shareholders are also willing to assume. Obviously stockholders will want the company to reach its "target capital structure" therefore leading to a high or stable level of return on their investments. The goal of the stockholder would be the maximize earnings rather then reduce them. Ultimately when dealing with capital structure there is a very crucial model, which was developed, by Modigliani and Miller in 1958 to reduce risk to all parties involved. This model is called the "law of conservation of value". If a company enacts this law correctly they will do so by assuming risk without reducing the value of their stock."
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