Capital Structure and Arbitrage

DOI

10.2991/assehr.k.211209.069How to use a DOI?

Keywords

Capital structure; Arbitrage; MM proposition; Firm value; WACC; Risk

Abstract

Capital structure is crucial to the income of corporations. And different arbitrage strategies can be set based on the different capital structures. However, the existing description of how capital structure can affect the financial state and how a company can take advantage of arbitrage is relatively obscure. Based on the Modigliani-Miller Proposition (MM Proposition), we analyze the firm value of two hypothetical companies and the possible risk facing them. Then we use the Weighted Average Cost of Capital (WACC) to compare whether they are in equilibrium. We find that with the same firm value (real asset), the firms are in equilibrium. Meanwhile, the investor can draw the advantage of arbitrage by selling an existing asset or borrowing from the public market, or both to purchase a new firm’s equity. This paper provides a better method to compare the financial state of different firms and use arbitrage strategy.

Copyright

© 2021 The Authors. Published by Atlantis Press International B.V.

Open Access

This is an open access article under the CC BY-NC license.

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TY  - CONF
AU  - Ke Shang
PY  - 2021
DA  - 2021/12/15
TI  - Capital Structure and Arbitrage
BT  - Proceedings of the 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021)
PB  - Atlantis Press
SP  - 414
EP  - 417
SN  - 2352-5428
UR  - https://doi.org/10.2991/assehr.k.211209.069
DO  - 10.2991/assehr.k.211209.069
ID  - Shang2021
ER  -