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Chapter 2.pdf - CHAPTER 2 CAPITAL STRUCTURE The Faculty of...

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CHAPTER 2 CAPITAL STRUCTURE The Faculty of Finance University of Economics, The University of Danang 1
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Reading Chapter 14 &16, Fundamentals of Corporate Finance; Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan; McGraw-Hill (2010). Chương 4,5 Giáo trình Tài chính doanh nghiệp; Nguyễn Hoà Nhân (2013) 2
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Chapter Outline Sources of Capital Cost of Capital Capital Structure Financial Leverage 3
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Key Concepts and Skills 4 Know the different sources of capital Know how to determine the cost of equity capital, the cost of debt and preferred stock, a firm’s overall cost of capital (WACC) Understand the relationship between capital structure and the cost of capital Understand the effect of financial leverage
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Sources of Capital Capital is wealth in the form of money or assets, taken as a sign of the financial strength of firm and assumed to be available for development or investment. Based on the nature of ownership o Equity Capital o Debt Capital
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Equity Capital Equity Capital is the capital that shareholders contributed without any promise of repayment. Sources of Equity Capital: Inibal Contribubon Addibonal Paid-in Capital Retained Earning Revaluabon Reserve Treasury Shares.
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² Ini:al Contribu:on: is the amount that shareholders inibally contributed to firm by purchasing shares of firm. o Inibal contribubon = Common Stock + Preferred Stock o Par value of common stock as well as preferred stock . o Primary market Equity Capital
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² Addi:onal Paid-in Capital: is the amount of money paid for shares of stock that exceeds the stated par value o Addibonal Paid-in Capital = Number of shares issued * (share price – par value) o Par value is typically set very low, therefore most of the amount paid by investor for stock will be recorded as addibonal paid-in capital. Equity Capital
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o Example : common stock of Company A has a par value of $0.1 per share. In March 2017, one share of stock is issued for $10. Common Stock $0.1 Paid-in Capital Excess of Par Value $9.9 Equity Capital
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Inibal Contribubon Addibonal Paid-in Capital Contributed Capital Equity Capital
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² Retained Earnings: is the amount of money from net income that firm keep to reinvest in business, instead of pay out as dividend to shareholders. o Retained earning = Net Income – Dividend Paid o Involves in Dividend Policy Equity Capital
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² Revalua:on reserve (revaluabon surplus): refers to the changes in value of property, plant and equipment. o Upward revaluabon increases the equity and downward revaluabon decrease the equity. Equity Capital
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² Treasury Shares: is the common shares that firm has repurchase back. This reduce the shareholders’ equity. Number of issued shares Number of treasury shares Number of outstanding shares Equity Capital
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Debt Capital Debt Capital (Liabilities) refer to the debts or obligations that arise during the course of its business operation.
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