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Corporate Finance: Optimal Capital Structure

Essay Instructions:

Please make sure to respond to both Part 1 and Part 2:



PART 1: Please discuss what you view as the most pressing financial theory confronting corporate finance today. Compare and contrast existing strategies and provide some ideas to design a new approach to improve the theory.



PART 2: Please watch one of the following videos and respond to the questions below.



Brown, D. [browngovernance]. (2008). What is the agency theory of corporate governance?

[Video file]. Retrieved from http://youtu(dot)be/HfnRbkYXH7o



Kahn Academy. (2008). Bailout 10: Moral hazard

[Video file]. Retrieved from https://www(dot)khanacademy(dot)org/economics-finance-domain/core-finance/money-and-banking/bank-bailout/v/bailout-10--moral-hazard



Critique the perils of moral hazard, efficient market theory, and agency using the videos and your reading of the unit lesson. Make an argument to either support or reject the bailout strategy and use scholarly articles from within the last five years to argue your view.

Essay Sample Content Preview:

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Week 1
Part 1
The most pressing theory confronting corporate finance today is related to optimal capital structure that creates value but reduces the cost of capital. It is true that conservative capital structure results in the increase of a firm’s stock price. Nevertheless, it is also true that a leveraged statement of financial position creates a tax shield on debt leading to more value. Therefore, institutions try to reconcile these views by maintaining a relatively conservative capital structure with set amount of debt. This problem can be solved by using past returns of an asset to establish its volatility and using the black scholes model to obtain the value of stock (call options).
Part 2
The concept of moral hazard results in unnecessary burden for the second party. In large companies, a lot of the equity holders are senior managers. Therefore, why would people who made wrong invest...
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