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capstruchoices - Capital Structure The Choices and the...

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Aswath Damodaran 2 Capital Structure: The Choices and the Trade off Neither a borrower nor a lender be Someone who obviously hated this part of corporate finance
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Aswath Damodaran 3 First Principles
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Aswath Damodaran 4 The Choices in Financing There are only two ways in which a business can make money. The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business. The other is equity. With equity, you do get whatever cash flows are left over after you have made debt payments.
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Aswath Damodaran 5 Global Patterns in Financing…
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Aswath Damodaran 6 And a much greater dependence on bank loans outside the US…
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Aswath Damodaran 7 Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals
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Aswath Damodaran 8 Stage 2 Rapid Expansion Stage 1 Start-up Stage 4 Mature Growth Stage 5 Decline Financing Choices across the life cycle External Financing Revenues Earnings Owner’s Equity Bank Debt Venture Capital Common Stock Debt Retire debt Repurchase stock External funding needs High, but constrained by infrastructure High, relative to firm value. Moderate, relative to firm value. Declining, as a percent of firm value Internal financing Low, as projects dry up. Common stock Warrants Convertibles Stage 3 High Growth Negative or low Negative or low Low, relative to funding needs High, relative to funding needs More than funding needs Accessing private equity Inital Public offering Seasoned equity issue Bond issues Financing Transitions Growth stage $ Revenues/ Earnings Time
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Aswath Damodaran 9 The Transitional Phases.. The transitions that we see at firms – from fully owned private businesses to venture capital, from private to public and subsequent seasoned offerings are all motivated primarily by the need for capital. In each transition, though, there are costs incurred by the existing owners: When venture capitalists enter the firm, they will demand their fair share and more of the ownership of the firm to provide equity. When a firm decides to go public, it has to trade off the greater access to capital markets against the increased disclosure requirements (that emanate from being publicly lists), loss of control and the transactions costs of going public. When making seasoned offerings, firms have to consider issuance costs while managing their relations with equity research analysts and rat
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Aswath Damodaran 10 Measuring a firm s financing mix … The simplest measure of how much debt and equity a firm is using currently is to look at the proportion of debt in the total financing. This ratio is called the debt to capital ratio: Debt to Capital Ratio = Debt / (Debt + Equity) Debt includes all interest bearing liabilities, short term as well as long term.
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