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- Title
CAPM, VALUATION OF FIRMS, AND FINANCIAL LEVERAGE.
- Authors
Narayanaswamy, C.R.; Phillips, Herbert E.
- Abstract
The irrelevance of capital structure in determining the value of the firm first was demonstrated by Modigliani and Miller [8]. Using the capital asset pricing model, Hamada [4] shows that the assumption of homogenous risk class is not necessary for the validity of the Modigliani and Miller propositions. Hamada's proof, however, applies only to the case of a single firm altering its financial leverage. This paper generalizes Hamada's results to the multifirm case. An implication is that the systematic risk of the stocks is affected by the financial leverage of all firms, in addition to the firm's financial leverage. Further, changes in the financial leverage of firms can alter the distribution of returns of the market portfolio.
- Subjects
CAPITAL assets pricing model; CAPITAL structure; FINANCIAL leverage
- Publication
Quarterly Journal of Business & Economics, 1987, Vol 26, Issue 1, p86
- ISSN
0747-5535
- Publication type
Article