IMPORTANT:
Let us consider the claim values in a world as proposed by M & M which deals with financial equity and debt only.
Each claim comes with a set of risk parameters. As far as any sort of residual claims are concerned, it is nothing but the equity that has been levered. If you consider this option along with compete ownership, you ought to figure out that it is a more risk approach.
Capital COST
In the event that the ratio of debt of a particular firm is comparatively high and the firm has a considerable amount of property or collateral involved. Then it is for certain that such a debt is free from any form of risk. Under such circumstances, even the rate of return falls. If the capital cost of a firm is ten percent and the rate that is free from risks is five percent, then equity that remains will be:
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