I s there a way of dividing a company’s capital base between debt and equity that can be expected to maximize fi rm value? And‚ if so‚ what are the critical factors in determining the target leverage ratio for a given company? Although corporate fi nance has been taught in business schools for more than a century‚ the academic fi nance profession has found it diffi cult to come up with defi nitive answers to these questions. Part of the diffi culty stems from how the discipline has evolved
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of Diageo‚ the treasury team was given the task of establishing the cost of capital for each of the different areas the company operated. The team had to create a simulation model which should consider new finance approaches‚ treasury functions to focus on‚ what the firm’s risk footprints will be‚ how to calculate cost of capital and finally how to optimally structure capital. How has Diageo managed its capital structure? Both Grand Metropolitan and Guinness had little debt prior to the merger‚
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Kale et al (1991) suggests that the level of risk is one of the main determinants of a firm`s capital structure. By looking at the trade off theory we might expect a negative association when risk and leverage are concerned. If firms have high earnings volatility‚ for some obvious reasons‚ they would not want to indulge in debt financing. It follows that when firms are exposed to bankruptcy and agency costs greater is the incentive to reduce the level of debt otherwise the more volatile a firm`s
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Capital Structure and Profit Capital Structure Definition A unite of a company’s long-term debt‚ specific short-term debt‚ common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable‚ whereas equity is classified as common stock‚ preferred stock or retained earnings. Also‚ Short-term debt such as working capital requirements is considered
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Capital Structure Practice Problems 1. Hayfin Enterprises has the following operating results and capital structure: Hayfin Enterprises ($000s) | | | Financial Data | | Revenue | $ 6‚000 | Operating Expenses | $ (4‚500) | EBIT (Operating Profit) | $ 1‚500 | | | Debt | $ 1‚200 | Equity | $ 8‚800 | Total Capital | $ 10‚000 | Interest rate on debt = 9% Share price = $25 (MV = BV) The firm is contemplating
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Capital Structure Decisions: Which Factors are Reliably Important? 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
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Ford Motor Company Valuation Business Case Stern Value Management Interview Vasishta Atmuri December 5‚ 2014 Ford Motor Co. Analysis| Stern Value Management Interview Introduction Ford Motor Co. manufactures and sells cars and is the sixth-largest car maker Stock Price in $ 20 1000000000 800000000 600000000 400000000 200000000 0 15 10 5 FINANCIAL HIGHLIGHTS Ticker F Date‚ as of 12/03/2014 Stock Price $16.01 P/E 10.47x Market Cap (mm) $61‚617 Dividend Yield Ford Motor Co. (NYSE:F)
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Notes to Consolidated Financial Statements (continued) complaints‚ which assert varying claims‚ including breach of contract‚ and violations of ERISA‚ state and federal law‚ all allege that the prices BNY Mellon charged and reported for standing instruction foreign exchange transactions executed in connection with custody services provided by BNY Mellon were improper. In addition‚ BNY Mellon has been named as a nominal defendant in several derivative lawsuits filed on various dates in 2011 and 2012
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Of Capital Structure THE DETERMINANTS OF CAPITAL STRUCTURE The Determinants of Capital Structure: A Case from Pakistan Textile Sector (Spinning Units) Pervaiz Akhtar National University Of Modern Languages‚ Islamabad Muhammad Husnain University Of Agriculture Faisalabad Muhammad Ahsan Mukhtar Muhammad Ali Jinnah University‚ Islamabad Proceedings of 2nd International Conference on Business Management (ISBN: 978-969-9368-06-6) 1 The Determinants Of Capital Structure 2 Abstract Capital structure
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MODULE 5: CAPITAL STRUCTURE & COST OF CAPITAL After studying this module‚ you should be able to: 1. Define the overall cost of capital 2. Calculate the cost of individual components of a firms’ overall cost of capital‚ cost of debt‚ cost of preferred stock and cost of equity 3. Calculate the firm WACC 4. Be able to define the term capital structure. 5. Explain the traditional approach to capital structure and the valuation of a firm. 6. Discuss the relationship between leverage and the cost of capital
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