FIN2101 BUSINESS FINANCE II
FIN2101 BUSINESS FINANCE II
Module 7 Capital Structure
Module 7 Capital Structure
Student activities Reading TeXt, Chapter 13(pp. 477-96 only) a Text Study Guide, Chapter 13(part only study book module 7 Tutorial activities a Tutorial Workbook self Assessment Activity 7.1 Text study Guide chapter 13 t/F,8,9 810:MC5,6,7,12,14,15
Student Activities Reading ◼ Text, Chapter 13 (pp. 477-96 only) ◼ Text Study Guide, Chapter 13 (part only) ◼ Study Book, Module 7 Tutorial Activities ◼ Tutorial Workbook, Self Assessment Activity 7.1 ◼ Text Study Guide, Chapter 13, T/F 1, 7, 8, 9 & 10; MC 5, 6, 7, 12, 14, 15
Introduction A company may issue several types of securities in varying combinations, but what it tries to do is find the combination that will maximise its overall market value a Capital structure is the proportionate relationship between a company's debt and equity Capital structure is the debt vs equity question. Should the company have some debt in its capital structure?
Introduction ◼ A company may issue several types of securities in varying combinations, but what it tries to do is find the combination that will maximise its overall market value. ◼ Capital structure is the proportionate relationship between a company’s debt and equity. ◼ Capital structure is the debt vs equity question. Should the company have some debt in its capital structure?
Introduction A financing decision Investment decisions are critical in determining returns to shareholders a Just how important financing decisions are has been subject to much debate
Introduction ◼ A financing decision. ◼ Investment decisions are critical in determining returns to shareholders. ◼ Just how important financing decisions are has been subject to much debate
Introduction a Financing decisions become irrelevant as long as equity holders are happy with their returns a firm can be highly levered yet no one is concerned as long as dividends are acceptable Problems arise when returns arent enough to cover debt commitments and dividends cease
Introduction ◼ Financing decisions become irrelevant as long as equity holders are happy with their returns. ◼ A firm can be highly levered yet no one is concerned as long as dividends are acceptable. ◼ Problems arise when returns aren’t enough to cover debt commitments and dividends cease
Capital Structure Dilemma does the manner in which investment proposals are financed matter? If SO what is the optimal capital structure? a Does varying the capital structure affect share price? If So, which financing policy maximises share price? How is a choice between alternative financing options made? Which option maximises shareholders' wealth?
Capital Structure Dilemma ◼ Does the manner in which investment proposals are financed matter? If so, what is the optimal capital structure? ◼ Does varying the capital structure affect share price? If so, which financing policy maximises share price? ◼ How is a choice between alternative financing options made? Which option maximises shareholders’ wealth?
Traditional Approach The RELEVANCE ARGUMENT capital structure is relevant to the market value of the firm and the firm's cost of capital a There is an optimal debt-to-equity mix that minimises wacc and maximises the market value of the firm to its shareholders
Traditional Approach ◼ The RELEVANCE ARGUMENT - capital structure is relevant to the market value of the firm and the firm’s cost of capital. ◼ There is an optimal debt-to-equity mix that minimises WACC and maximises the market value of the firm to its shareholders
Traditional Approach aa company is able to increase its total market value and decrease its wacc by the use of moderate amounts of debt There is an optimal level of debt and an optimal capital structure
Traditional Approach ◼ A company is able to increase its total market value and decrease its WACC by the use of moderate amounts of debt. ◼ There is an optimal level of debt and an optimal capital structure
Traditional Approach k k OCS D:E Ratio
Traditional Approach k OCS D:E Ratio ks k kd