Financial Policy and Firm Value

• Once we've decided which projects to take (i.e., the investment decision), the next thing we have to do is figure out how we're going to get the cash to pay for them (i.e., the financing decision). The question that we're faced with is, "Does how we choose to finance our projects affect the value of our projects?" Or, put another way, is there some "optimal" way to finance our projects - where by "optimal" we mean a capital structure that maximizes the value of our projects?

Why might financial policy affect the value of a firm's projects (i.e., firm value)?

How is firm value related to firm financial policy?

We want to develop some understanding of the possible connection between firm value and firm financial policy.

The Modigliani and Miller proposition is where we start.