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Chapter 2 - The domestic and international financial marketplace. This chapter looks at the domestic and international financial marketplaces that allocate scarce resources. | 2 The Domestic and International Financial Marketplace Introduction This chapter looks at the domestic and international financial marketplaces that allocate scarce resources. Finance Decisions Affecting SWM Form of business organization Types of financing Investment projects All based on after-tax cash flow Implication of Income Taxes for Financial Managers Capital structure policy Tax advantage of debt financing Dividend policy Capital gains vs. Dividend policy Capital budgeting After-tax CFs, Depreciation, Net present value (NPV) Leasing Motivated by tax effects Capital Structure Policy Taxes have important implications for capital structure policy because the interest payments associated with debt financing are deductible from earnings when computing a company’s income tax liability, whereas common stock dividends and preferred stock dividends are not deductible. Dividend Policy When dividends are paid to common stockholders, these dividends are taxed immediately as income to the shareholder. If, instead of paying dividends, a firm retains and reinvests its earnings, the price of the stock can be expected to increase. Personal taxes owned on common stock appreciation are deferred until the stock is sold. Dividend Policy The ability to defer personal taxes on retained earnings causes some investors (e.g., those in high marginal tax brackets) to prefer retention and reinvestment and ultimately capital gains rather than immediate dividend payments. Capital Budgeting Capital expenditures require an outlay of after-tax dollars in order to acquire the needed assets. The assets are expected to generate a stream of operating income that is subject to tax. Capital Budgeting A tax-deductible expense associated with many capital expenditures is depreciation. Depreciation provides a tax deduction equal to a part of the original cost of a depreciable asset, such as machinery or buildings. Capital Budgeting The tax code details the methods that may be used to depreciate . | 2 The Domestic and International Financial Marketplace Introduction This chapter looks at the domestic and international financial marketplaces that allocate scarce resources. Finance Decisions Affecting SWM Form of business organization Types of financing Investment projects All based on after-tax cash flow Implication of Income Taxes for Financial Managers Capital structure policy Tax advantage of debt financing Dividend policy Capital gains vs. Dividend policy Capital budgeting After-tax CFs, Depreciation, Net present value (NPV) Leasing Motivated by tax effects Capital Structure Policy Taxes have important implications for capital structure policy because the interest payments associated with debt financing are deductible from earnings when computing a company’s income tax liability, whereas common stock dividends and preferred stock dividends are not deductible. Dividend Policy When dividends are paid to common stockholders, these dividends are taxed immediately as income to the
