SOME ASPECTS OF PURE THEORY OF CORPORATE FINANCE - BANKRUPTCIES AND TAKE-OVERS

Consideration of the implications of bankruptcies, take-overs, and divergent expectations for the financial policy of the firm; under the assumption that there is an optimal debt equity ratio. Under certain very restrictive conditions, the no bankruptcy condition may be removed. When these conditions are not satisfied, and when there is a real possibility of bankruptcy if the firm issues too much debt, the firm's valuation will depend on its debt-equity ratio; the real decisions of the firm (e. g. , its investment and choice of technique) cannot be separated from its financial decisions; and the real decisions of the firm may not be productively efficient. Finally, the implications of the possibility of a take-over for the financial policy of the firm are considered.