MODULE II Capital structure-theories of capital structure – MM model‚ incentive issues and agency cost; financial signaling; Capitalization-under capitalization –over capitalization-capital gearing Leverage – operating leverage-financial leverage Cost –volume- profit analysis PREPARED BY MRS. REKHA VENUGOPAL Capital structure In order to run and manage a company funds are needed. Right from the promotional stage
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Chapter 12 Determining the financing mix I. Risk * Variability associated with expected revenue or income streams. Such variability may arise due to: * Choice of business line (business risk) * Choice of an operating cost structure (operating risk) * Choice of Capital structure (financial risk) a) Business Risk * Variation in the firm’s expected earnings attributable to the industry in which the firm operates. There are four determinants of business risk:
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------------------------------------------------------------------------------------------------------------------------------------------ Assume you have just been hired as a business manager of PizzaPalace‚ a regional pizza restaurant chain. The company ’s EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity‚ and it has 10 million shares outstanding. When you took your corporate finance course‚ your instructor stated that most firms ’ owners
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equity debt mix is 50:50 but if you increase it as 20: 80‚ it will increase the market value of firm and its positive effect on the value of per share. High debt content mixture of equity debt mix ratio is also called financial leverage. Increasing of financial leverage will be helpful to for maximize the firm’s value. 2nd Theory of Capital Structure Name of Theory = Net Operating income Theory of
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providing a lower risk to the home company PDVSA. The costs attached with using project finance instead of traditional debt finance are: 1. High cost of political risk insurance would increase the interest rate associated with debt. As a result higher leverage through project finance would be costlier. 2. Chances of a negative carry due to inflow of large amount of funds via bond in the start‚ which would not have its usage then. As a result these bonds would fetch a lower investment gin and cause a higher
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comparisons of current and past ratio values. Combined Analysis mixes both features of Cross-Sectional and Time Series Analysis. Ratios are grouped into five basic categories: liquidity ratios‚ activity ratios‚ leverage ratios‚ profitability ratios‚ and; Market ratios Ratio Analysis Example Bartlett Company refers to the firm’s ability to satisfy its short-term obligations as they come due. Liquidity Three areas are of particular concern:
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IHI White Paper LP4 04/04/2014 The White Paper I choose to read was titled Seven Leadership Leverage Points for organization-Level Improvement in Health Care second edition. It was written by three authors James L. Reinertsen‚ MD: Senior Fellow‚ IHI; President‚ The Reinertsen Group Maureen Bisognano: Executive Vice President and Chief Operating Officer‚ IHI Michael D. Pugh: President and CEO‚ Verisma Systems‚ Inc. This paper talks about the importance of leadership in the health care field
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Murray Z. Frank1 and Vidhan K. Goyal2 First draft: March 14‚ 2003. Current draft: December 20‚ 2003. ABSTRACT This paper examines the relative importance of 38 factors in the leverage decisions of publicly traded U.S. firms from 1950 to 2000. The most reliable factors are median industry leverage (+ effect on leverage)‚ market-to-book ratio (-)‚ collateral (+)‚ bankruptcy risk as measured by Altman’s Z-Score (-)‚ dividend-paying (-)‚ log of sales (+)‚ and expected inflation (+). These seven factors
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equity. However‚ when a company’s financial leverage increases as it takes on more debt capital‚ there is an increasing risk for stockholders. The cost of equity therefore will rise‚ perhaps offsetting the benefits of raising cheap debt capital. Although management cannot be specific about the optimal capital structure for their company‚ they should at least be aware of • how banks and the capital markets might respond to an increase in the company’s leverage level if it were to borrow new funds‚ and
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percentage. The useful life of the equipment is 25 years and residual value is 15% of the cost. After getting the results of DFC model of both the leverage-lease and the debt financing‚ it is easy to define that both options have advantages and disadvantage. The leverage-lease cost of debt is 220.26M‚ and the debt financing is 260.26M; therefore the leverage- lease is better. The disadvantage is that the equipment is a lease‚ and Amtrak sooner or later will have to return it‚ instead keep it. The advantage
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