Scribd
Upload
10 views8 pages

Capital Market Honey

Uploaded by

miej1173
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
10 views8 pages

Capital Market Honey

Uploaded by

miej1173
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 8

Chapter 11:

THE CORPORATE
FINANCING DECISION
Debt vs. Equity
• Three sources of capital;
1. Debt – an obligation or liability that one party owes to
another, usually the involving the repayment of money.
2. Internally Generated Equity – refers to the equity that
a company creates through its own operations.
3. New Equity – refers to new capital or funding raised by
a company through the issuance of the additional shares
of its stock.
• Financial Leverage – the use of financing that has fixed,
but limited payments.
• Financial Distress – the condition where the company
makes decision under pressure to satisfy its obligation to
its creditors.
One measure of the extent debt is used to finance a
company is the debt ratio, the ratio of debt to equity:
Debt
Debt ratio=
Equity
The Concept of Leverage
• Business Risk – the uncertainty associated with the earnings
from operations.
• Sales Risk – the risk associated with sales as a result of
economic and market forces that affect the volume and prices of
goods and services sold.
• Operating Risk – the risk associated with the cost structure of
the company’s asset.
• Degree of Operating Leverage (DOL) – fixed costs operate as a
fulcrum in this leverage are specifically the fixed operating costs.
Capital Structure and Financial
Leverage
Debt and Equity Financing create different types of
obligations for the company.
 Debt Financing – obligates the company to pay creditors
interest and principal, usually a fixed amount.

 Equity Financing – the process of raising capital by


selling shares of a company to investors.
Financial Leverage and Risk
• The use of financial leverage increases the range of possible
outcomes for owners of the company.
 With its leverage effect, it can be obtained in three ways:
By reducing the assets in some way, such as using working
capital needed for operations or selling equipment.
By taking on more obligatons.
By issuing more share of stock.
Capital Structure and Taxes
 Interest Tax Shield – refers to the benefit from interest
deductibility, because the interest expense shields income
from taxation. The tax shield from interest deductibility is,
Tax shield = Tax rate x Interest expense
 Unused Tax Shield – refers to the portion of tax
deduction or tax credit that a taxpayer is eligible for but
has been able to use, typically because the entity doesn’t
have enough taxable income to offset the deduction or
credit.
Capital Structure and Financial
Distress
Limited Liability – limits owners’ liability for obligation to the amount of their
original investment in the share of stock.
 Factors that influence the present value of the cost of financial distress:
 The probability of financial distress increases with increases in business risk.
 The probability of financial distress increases with increases in financial risk.
 Limited liability increases the incentives for owners to take on greater business
risk.
 The cost of bankruptcy increase the more the value of the company depends on
intangible assets.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy