Financial management Assignment Example | Topics and Well Written Essays - 3000 words

Financial management - Assignment ExampleIn a perfect market, it is assumed that no taxes are imposed and involvement rates are derived by the market demand and supply function (Layton, Robinson & Tucker 2012, p. 895).If we consider a perfect competition in the market, an investor would be deaf(p) of the capital structures followed by each firm. The M&M supposition suggests that in a tax-free economy, capital structure becomes irrelevant to the value of the firm. Some assumptions that the theory makes includeInvestors are refer about the returns or future cash inflows. Hence, they expect the same whether the investment is made in bonds or equity. As a result, investors would make decisions based on the firms value.Debt and equity components are traded in perfect markets, such that the transaction cost, taxes and bankruptcy costs are nil. Competitors, in a perfect competition market cannot set their own price for similar product offerings. Moreover, investors do not bear the burde n of transaction costs leading to their indifference to moving funds from one company to the other.Keeping an eye on the above discussion, it can be concluded that investors would go for an pitch company if they are interested in the investment returns. In the case provided, Aguia seems to be a more lucrative opportunity for the investors. Aguia, being a gear company will have lower cost of capital and have higher expected returns in future. Since, it was assumed and provided above that investors are only concerned about the future cash flows, a perspicacious investor would prefer a geared firm i.e. Aguia over the un-geared firm i.e. Pomba, in our case. In addition, a rational investor can make decision on future prospects and plans of the management. Lets assume that Pomba plans to switch toward debt financing, it might be a more attractive pickax compared to Aguia as it has higher profit margins comparatively. Hence, financing arrangements in a