Corporate Finanace
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. With equity, you do get whatever cash flows are left over after you have made debt payments.
Aswath Damodaran!
4!
Global Patterns in Financing…
Aswath Damodaran!
5!
And a much greater dependence on bank loans outside the
US…
Aswath Damodaran!
6!
Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals
Aswath Damodaran!
7!
Financing Choices across the life cycle
Revenues
$ Revenues/
Earnings
Earnings
Time
External funding needs High, but constrained by infrastructure High, relative to firm value.
Moderate, relative to firm value.
Declining, as a percent of firm value Internal financing
Negative or low Negative or low Low, relative to funding needs
High, relative to funding needs
More than funding needs
External
Financing
Owner’s Equity
Bank Debt
Venture Capital
Common Stock
Common stock
Warrants
Convertibles
Debt
Retire debt
Repurchase stock
Growth stage
Stage 1
Start-up
Stage 2
Rapid Expansion
Stage 4
Mature Growth
Stage 5
Decline
Financing
Transitions
Aswath Damodaran!
Accessing private equity
Inital Public offering
Stage 3
High Growth
Seasoned
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. With equity, you do get whatever cash flows are left over after you have made debt payments.
Aswath Damodaran!
4!
Global Patterns in Financing…
Aswath Damodaran!
5!
And a much greater dependence on bank loans outside the
US…
Aswath Damodaran!
6!
Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals
Aswath Damodaran!
7!
Financing Choices across the life cycle
Revenues
$ Revenues/
Earnings
Earnings
Time
External funding needs High, but constrained by infrastructure High, relative to firm value.
Moderate, relative to firm value.
Declining, as a percent of firm value Internal financing
Negative or low Negative or low Low, relative to funding needs
High, relative to funding needs
More than funding needs
External
Financing
Owner’s Equity
Bank Debt
Venture Capital
Common Stock
Common stock
Warrants
Convertibles
Debt
Retire debt
Repurchase stock
Growth stage
Stage 1
Start-up
Stage 2
Rapid Expansion
Stage 4
Mature Growth
Stage 5
Decline
Financing
Transitions
Aswath Damodaran!
Accessing private equity
Inital Public offering
Stage 3
High Growth
Seasoned