Ross et al.: Fundamentals
of Corporate Finance, Sixth
Edition, Alternate EditionFront Matter Preface © The McGraw−Hill^27
Companies, 2002Dilution of Proportionate Ownership 555
Dilution of Value: Book versus Market Values 555
A Misconception 556
The Correct Arguments 556
16.10 Issuing Long-Term Debt 557
16.11 Shelf Registration 558
16.12 Summary and Conclusions 559
Chapter 17
Financial Leverage and Capital Structure Policy 567
17.1 The Capital Structure Question 568
Firm Value and Stock Value: An Example 568
Capital Structure and the Cost of Capital 569
17.2 The Effect of Financial Leverage 570
The Basics of Financial Leverage 570
Financial Leverage, EPS, and ROE: An Example 570
EPS versus EBIT 571
Corporate Borrowing and Homemade Leverage 573
17.3 Capital Structure and the Cost of Equity
Capital 575
M&M Proposition I: The Pie Model 575
The Cost of Equity and Financial Leverage:
M&M Proposition II 576
Business and Financial Risk 578
17.4 M&M Propositions I and II with Corporate
Taxes 579
The Interest Tax Shield 579
Taxes and M&M Proposition I 580
Taxes, the WACC, and Proposition II 581
Conclusion 582
17.5 Bankruptcy Costs 584
Direct Bankruptcy Costs 585
Indirect Bankruptcy Costs 585
17.6 Optimal Capital Structure 586
The Static Theory of Capital Structure 586
Optimal Capital Structure and the Cost of
Capital 587
Optimal Capital Structure: A Recap 588
Capital Structure: Some Managerial
Recommendations 590
Taxes 590
Financial Distress 590
17.7 The Pie Again 591
The Extended Pie Model 591
Marketed Claims versus Nonmarketed Claims 592
17.8 Observed Capital Structures 593
17.9 A Quick Look at the Bankruptcy Process 594
Liquidation and Reorganization 595
Bankruptcy Liquidation 595
Bankruptcy Reorganization 596
Financial Management and the Bankruptcy
Process 597
Agreements to Avoid Bankruptcy 597
17.10 Summary and Conclusions 598Chapter 18
Dividends and Dividend Policy 605
18.1 Cash Dividends and Dividend Payment 606
Cash Dividends 606
Standard Method of Cash Dividend Payment 607
Dividend Payment: A Chronology 607
More on the Ex-Dividend Date 608
18.2 Does Dividend Policy Matter? 609
An Illustration of the Irrelevance of Dividend
Policy 609
Current Policy: Dividends Set Equal to Cash Flow 609
Alternative Policy: Initial Dividend Greater than
Cash Flow 610
Homemade Dividends 610
A Test 611
18.3 Real-World Factors Favoring a Low Payout 612
Taxes 612
Expected Return, Dividends, and Personal Taxes 613
Flotation Costs 613
Dividend Restrictions 614
18.4 Real-World Factors Favoring a High Payout 614
Desire for Current Income 614
Uncertainty Resolution 615
Tax and Legal Benefits from High Dividends 615
Corporate Investors 615
Tax-Exempt Investors 615
Conclusion 616
18.5 A Resolution of Real-World Factors? 616
Information Content of Dividends 616
The Clientele Effect 617
18.6 Establishing a Dividend Policy 618
Residual Dividend Approach 618
Dividend Stability 620
A Compromise Dividend Policy 621
18.7 Stock Repurchase: An Alternative to Cash
Dividends 623
Cash Dividends versus Repurchase 623
Real-World Considerations in a Repurchase 625
Share Repurchase and EPS 625
18.8 Stock Dividends and Stock Splits 626
Some Details on Stock Splits and Stock
Dividends 626
Example of a Small Stock Dividend 626
Example of a Stock Split 627
Example of a Large Stock Dividend 627
Value of Stock Splits and Stock Dividends 628
The Benchmark Case 628
Popular Trading Range 628
Reverse Splits 629
18.9 Summary and Conclusions 630CONTENTS xxvii