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Market Value of the Firm, Market Value of Equity, Return Rate on Capital and the Optimal Capital Structure

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  • Chao Chiung Ting

Abstract

The firm should pursue both maximum return rate on capital and maximum return rate on equity simultaneously. Maximum return rate on capital is the primary goal for firms because maximum return rate on capital guarantees efficiency. Therefore, maximum profit, maximum market value of the firm, maximum value of equity and maximum return rate on equity are inappropriate to be the primary goal. Since gross profit is independent of capital structure, capital structure just distributes return on capital into equity and debt (i.e., maximum return rate on equity determines capital structure). The maximum return rate on equity is the secondary goal that the firm pursues. Leverage makes the return rate on equity be higher than interest rate. Leverage explains the puzzle of equity premium.

Suggested Citation

  • Chao Chiung Ting, 2012. "Market Value of the Firm, Market Value of Equity, Return Rate on Capital and the Optimal Capital Structure," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 3(4), pages 1-6, October.
    • Handle: RePEc:jfr:ijfr11:v:3:y:2012:i:4:p:1-6
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    References listed on IDEAS

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    1. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    2. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    3. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    4. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
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    Cited by:

    1. Rodica Baciu & Brezeanu Petre, 2018. "Impact Of Financial Structure On Return On Equity: Evidence From Wholesale Of Motor Vehicle Parts And Accessories Industry," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 6(4), pages 38-47.
    2. Chao Chiung Ting, 2018. "Phillips Curve Is a Particular Case that Economists Misinterpret the Correlation between Two Dependent Variables for Causal Relation," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(11), pages 1-70, November.
    3. Chao Chiung Ting, 2020. "Lucas Paradox, Declining Labor Share, Tendency of Rate of Profit to Fall of Karl Marx and Growth Theory of the Firm," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(9), pages 1-53, September.
    4. Chao Chiung Ting, 2022. "Pollution, Production Efficiency and Economic Growth: A Synthesis," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(9), pages 1-1, September.

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