CORPORATE FINANCE Essay Example | Topics and Well Written Essays - 1500 words

CORPORATE FINANCE - Essay Example It had been generally assumed that there is an optimal mixture of debt and equity in a firm's capital structure that results in a shallow, U-shaped average cost-of-capital curve. That is to say, the market value of the firm will rise to a point with an increase in the debt ratio. Beyond that point, any increase in the debt ratio will cause the market value of the firm to decline. (Ariff and Lau, p. 391-410) Precisely, the traditional view states that capital structure may impact the cost of capital and in that way influence the value of a firm. It holds that the reasonable or rational use of leverage will decrease the total cost of capital primarily and therefore also add to value. When leverage turns out to be excessively high, beyond an optimal point, the cost of capital will begin to increase and hence the value will decline. There is no specific recognition of how to measure either a moderate or reasonable or optimal capital structure (Ariff and Hassan, p. 11). Some have accepted a moving average of historical capital structure; others have accepted an industry ratio. This concept is depicted through Figure 1 below: Although the traditional view appears to be substantially correct in relation to recognized real world behavior of capital structure, it suffers from lack of rigorous proof. ... b) The Independence Hypothesis: Modigliani and Miller (1958) Modigliani and miller 1were the first to develop a modern theory of capital structure supported by rigorous mathematical proof. The M&M (1958) theory is based on several simplifying assumptions: i. Perfect and frictionless capital markets with investors that behave rationally; ii. Individuals can borrow and lend at the same interest rate regardless the amounts; iii. No corporate or personal income taxes' iv. The firm's cost of equity depends upon its business risk class; v. Firms issue only risk-free debt and risk equity, and thus there are no bankruptcy costs; vi. Operating earnings of the firm are not expected to grow. The original M&M theory holds that the average cost of capital is independent of the firm's capital structure and equal to the capitalization rate of an unlevered stream of earnings at the capitalization rate appropriate to its risk class. As a result, the total market value of the firm is independent of its capital structure. Figure 2: Adopted from figure 5 Maugham, 2000, p.1 The original M&M result was obtained assuming perfect capital markets. Subsequent literature has relaxed the underlying assumptions of M&M's 1958 model. Stiglitz (1969) proved, using a state preference framework that the M&M result (1958) holds with risky debt, so long as there are no bankruptcy costs. Hamada (1969), using the CAMP, showed that the M&M result (1958) holds in a world where assets are allowed to have different risk classes. Mossin (1969), using a modified version of Sharpe's single-period asset valuation model, showed that in tax less, frictionless markets where there is no possibility that the firm will go bankrupt, changes in its debt-equity ratio will not alter the total market value of

Government Expansion for National Security Essay

Government Expansion for National Security - Essay Example Law enforcement agencies across the nation are faced with the dilemma with countering terrorist threats based on information that are at best loaded with the scenario that any potential terrorist act may actually happen. Using any information, most of the time unverified and unspecified to issue alert warnings to the public has been justified on the premise that the September 11 attacks happened because the intelligence agencies were slow to issue warnings and release information to other law enforcement agencies. The pre-emptive orientation of the intelligence community has gathered force in the face of growing concerns that civil liberties are in danger of being trampled. In 2004, Congress passed the Intelligence Reform and Terrorism Prevention Act of 2004, creating a Director of National Intelligence to be on top of the country's intelligence community. He also acts as the President's top intelligence adviser. While this move was meant to coordinate nationwide intelligence operati ons, there have been considerable areas of conflict among the law enforcement agencies. The public has recently seen the military and the Central Intelligence Agency encroaching too much on the sphere of domestic intelligence, which is the turf of the Federal Bureau of Investigation. Financial records of individuals and other parties who are suspected of being involved in terrorism have been examined by the FBI through the issuance of national security letters and for the most part, banks and other institutions have cooperated. However, it has been reported that even the Pentagon and the CIA have been issuing their own version of the national security letters (Lichtblau & Mazzetti 2007). Furthermore, the FBI has complained that the military have been directly dealing with the police, without proper coordination with the bureau in issuing warnings against possible terrorist threats. The White House is also mulling to give more teeth to an agency within the Pentagon called the Counterintelligence Field Activity or CIFA currently in-charge of coordinating security efforts by giving it authority to investigate crimes such as trea son, foreign or terrorist sabotage, including economic sabotage within the country (Pincus 2005). Moreover, a legislation is being pushed to allow the military access to the database on U.S. citizens gathered by the FBI. Concerns about this have been somehow mitigated by an amendment which will require the Pentagon to seek approval for this data-sharing from the Director of the National Intelligence and to report to Congress any of such activity. The question of whether executive powers should be expanded has come to pass because in fact the American public has indeed given its go-signal for this to happen. While the public has recently been against the War in Iraq and other reports concerning Government Expansion for National Security 2 domestic spying, the American people had been united right after the September 11 attacks in giving President Bush authority to deal with the terrorist threat