Topic13_cap_struct[1]

Topic13_cap_struct[1] - Thomas Moeller FINA 30153:...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Thomas Moeller FINA 30153: Financial Management 1 Topic 13 Capital structure theory Objectives 1.Review the sources of external financing 2.Discuss the concept of capital structure 3.Understand the effect of leverage on the return on equity 4.Analyze capital structure in perfect capital markets 5.Understand the effect of corporate taxes on capital structure 6.Discuss the costs of financial distress
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Thomas Moeller FINA 30153: Financial Management 2 1. Sources of external financing Commercial banks o Provide debt financing o Often take a hands-on role with the firm: ± Screening ± Monitoring ± Relationship lending Venture Capital (VC) o Equity investors o VCs are generally very hands-on investors: ± Intense screening of investments ± Board participation ± Frequent visits to portfolio companies
Background image of page 2
Thomas Moeller FINA 30153: Financial Management 3 Capital markets o When issuing securities, the firm must go through different steps: ± Obtain approval from board of directors ± Prepare registration statement and file it with the SEC ± Firm distributes preliminary prospectus while awaiting SEC approval ± Then price is determined for the securities ± Securities are sold to investors o IPOs ± An IPO is the initial public offering of stock of the firm.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Thomas Moeller FINA 30153: Financial Management 4 ± Investment banks play a crucial role in the going public process. ± Issuer and investment bank agree on the offer price for the shares. ± IPOs are underpriced on average. Mean underpricing: o 1994: 11.89% o 1999: 70.94% o SEOs ± Once the company has done an IPO and is publicly traded, subsequent stock issuances are referred to as seasoned equity offerings (SEOs). ± Immediately upon announcing an SEO, stock prices drop by about 3%, on average.
Background image of page 4
Thomas Moeller FINA 30153: Financial Management 5 ± The most compelling reason - the “Lemon’s Problem” The firm is more likely to sell equity when the stock is overvalued. o Bond offerings ± Issuing debt is similar to issuing equity, but the costs are lower and private placements are more common. o Preferred stocks
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Thomas Moeller FINA 30153: Financial Management 6 2. Capital structure The first part of this class discussed how to structure the left -hand side of the balance sheet to maximize firm value. Now we ask: How can we structure the right- hand side to further enhance firm value? By "capital structure" we mean the mix of securities issued by the firm. In particular, we will be interested in determining if there is an optimal capital structure. That is, when a company needs to raise funds, what type of securities should it issue?
Background image of page 6
Thomas Moeller FINA 30153: Financial Management 7 When the firm is financed entirely by common stock, all cash flows belong to the equityholders.
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 32

Topic13_cap_struct[1] - Thomas Moeller FINA 30153:...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online