TAILIEUCHUNG - Lecture Intermediate corporate finance – Chapter 15: Capital structure decisions (Part I)

This chapter presents the following content: Overview and preview of capital structure effects; business versus financial risk; the impact of debt on returns; capital structure theory, evidence, and implications for managers; example: choosing the optimal structure. | Chapter 15 Capital Structure Decisions: Part I Topics in Chapter Overview and preview of capital structure effects Business versus financial risk The impact of debt on returns Capital structure theory, evidence, and implications for managers Example: Choosing the optimal structure Basic Definitions V = value of firm FCF = free cash flow WACC = weighted average cost of capital rs and rd are costs of stock and debt wce and wd are percentages of the firm that are financed with stock and debt. How can capital structure affect value? V = ∑ ∞ t=1 FCFt (1 + WACC)t WACC= wd (1-T) rd + wcers A Preview of Capital Structure Effects The impact of capital structure on value depends upon the effect of debt on: WACC FCF (Continued ) The Effect of Additional Debt on WACC Debtholders have a prior claim on cash flows relative to stockholders. Debtholders’ “fixed” claim increases risk of stockholders’ “residual” claim. Cost of stock, rs, goes up. Firm’s can deduct interest expenses. Reduces the taxes paid Frees up more cash for payments to investors Reduces after-tax cost of debt (Continued ) The Effect on WACC (Continued) Debt increases risk of bankruptcy Causes pre-tax cost of debt, rd, to increase Adding debt increase percent of firm financed with low-cost debt (wd) and decreases percent financed with high-cost equity (wce) Net effect on WACC = uncertain. (Continued ) The Effect of Additional Debt on FCF Additional debt increases the probability of bankruptcy. Direct costs: Legal fees, “fire” sales, etc. Indirect costs: Lost customers, reduction in productivity of managers and line workers, reduction in credit (., accounts payable) offered by suppliers (Continued ) Impact of indirect costs NOPAT goes down due to lost customers and drop in productivity Investment in capital goes up due to increase in net operating working capital (accounts payable goes down as suppliers tighten credit). (Continued ) Additional debt can affect the behavior of .

• Kế toán - Kiểm toán
• Intermediate corporate finance
• Corporate finance
• Lecture Intermediate corporate finance
• Tài chính doanh nghiệp
• Financial management
• Capital structure decisions
• Corporate valuation
• Value based management
• Financial reporting
• Social welfare
• Forward contracts
• The stock markets
• Basic return concepts
• Portfolio theory
• Bond valuation
• Basic stock valuation
• Accounting for financial management
• Analysis of financial statements
• Financial planning
• Forecasting financial statements
• Capital budgeting
• Decision criteria
• Estimating cash flows
• Real options