Long-Term Financing and Corporate Capital Structure
8/30/2013
Long-term financing, g g, corporate capital structure
Advanced Corporate Finance 4.1 5 + 6 September 2013
Corporate finance: (1) managing the balance sheet
Cash + Liquid assets Accounts receivable Inventory
Short t Sh t term liabilities li biliti - short term debt - accounts payable
Long term liabilities LT assets - fixed - non-fixed - financial
Equity
1
8/30/2013
Corporate Finance at different levels + (2) managing the cash flow needs
• Long term finance (LT investments, capital structure) investments • Short term finance, working capital management (working capital management, net working capital) • Liquidity management ("never" out of cash) • Cash management (organization of the payments flow)
Theory Capital Structure
2
8/30/2013
Long term financing: the capital structure
• • • • • • • • Neoclassic theory proposition Modigliani & Miller, MM1 proposition Modigliani & Miller, MM2 “anomaly”: Tax (MM + corporate tax) “anomaly”: Income Tax (MM + all tax) “view I”: Insolvency costs (Static Trade off theory) “view II” A “ i II”: Agency costs t “view III”: Pecking order theory
Neo-classical finance theory
• A company is regarded as a black box. One goal, no conflicts of interest. interest Business cashflows are given. given • Perfect market: capital will flow to business opportunities with optimal risk-return relationship. No tax, no transaction costs, no information costs, no distress (market-efficiency) • Symmetric information (homogeneous perceptions and expectations) no agency costs p ) g y • Investors are risk-averse Abstract framework to build financial models
3
8/30/2013
Modigliani & Miller
M&M I I th neo-classic framework the company value is independent to the I. In the l i f k th l i i d d t t th financing decision. Only the asset value determines the value of a company. M&M II In the neo-classic framework the total costs of capital are independent to the financing decision. Assumptions:
Long-term financing, g g, corporate capital structure
Advanced Corporate Finance 4.1 5 + 6 September 2013
Corporate finance: (1) managing the balance sheet
Cash + Liquid assets Accounts receivable Inventory
Short t Sh t term liabilities li biliti - short term debt - accounts payable
Long term liabilities LT assets - fixed - non-fixed - financial
Equity
1
8/30/2013
Corporate Finance at different levels + (2) managing the cash flow needs
• Long term finance (LT investments, capital structure) investments • Short term finance, working capital management (working capital management, net working capital) • Liquidity management ("never" out of cash) • Cash management (organization of the payments flow)
Theory Capital Structure
2
8/30/2013
Long term financing: the capital structure
• • • • • • • • Neoclassic theory proposition Modigliani & Miller, MM1 proposition Modigliani & Miller, MM2 “anomaly”: Tax (MM + corporate tax) “anomaly”: Income Tax (MM + all tax) “view I”: Insolvency costs (Static Trade off theory) “view II” A “ i II”: Agency costs t “view III”: Pecking order theory
Neo-classical finance theory
• A company is regarded as a black box. One goal, no conflicts of interest. interest Business cashflows are given. given • Perfect market: capital will flow to business opportunities with optimal risk-return relationship. No tax, no transaction costs, no information costs, no distress (market-efficiency) • Symmetric information (homogeneous perceptions and expectations) no agency costs p ) g y • Investors are risk-averse Abstract framework to build financial models
3
8/30/2013
Modigliani & Miller
M&M I I th neo-classic framework the company value is independent to the I. In the l i f k th l i i d d t t th financing decision. Only the asset value determines the value of a company. M&M II In the neo-classic framework the total costs of capital are independent to the financing decision. Assumptions: