A Rose by Any Other Name Essay

18873 Words Nov 7th, 2014 76 Pages
Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation

B40.2302

Aswath Damodaran

Aswath Damodaran!

1!

Capital Structure: The Choices and the Trade off

Neither a borrower nor a lender be

Someone who obviously hated this part of corporate finance

Aswath Damodaran!

2!

First Principles

Aswath Damodaran!

3!

The Choices in Financing



There are only two ways in which a business can make money.

• The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business.

• The other is equity.
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The Transitional Phases..





The transitions that we see at firms – from fully owned private businesses to venture capital, from private to public and subsequent seasoned offerings are all motivated primarily by the need for capital.

In each transition, though, there are costs incurred by the existing owners:

• When venture capitalists enter the firm, they will demand their fair share and more of the ownership of the firm to provide equity.

• When a firm decides to go public, it has to trade off the greater access to capital markets against the increased disclosure requirements (that emanate from being publicly lists), loss of control and the transactions costs of going public.

• When making seasoned offerings, firms have to consider issuance costs while managing their relations with equity research analysts and rat

Aswath Damodaran!

9!

Measuring a firm s financing mix …



 

The simplest measure of how much debt and equity a firm is using currently is to look at the proportion of debt in the total financing. This ratio is called the debt to capital ratio:

Debt to Capital Ratio = Debt / (Debt + Equity)

Debt includes all interest bearing liabilities, short term as well as long term.

Equity can be defined either in accounting terms (as book value of equity) or in market value terms (based upon the current price). The resulting debt ratios can be very different.

Aswath Damodaran!

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