cfpacket2a - Aswath Damodaran 1 Corporate Finance Lecture...

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Unformatted text preview: Aswath Damodaran 1 Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation B40.2302 Aswath Damodaran Aswath Damodaran 2 Capital Structure: The Choices and the Trade off l Neither a borrower nor a lender be z Someone who obviously hated this part of corporate Fnance Aswath Damodaran 3 First Principles Aswath Damodaran 4 The Choices in Financing There are only two ways in which a business can make money. The frst is debt. The essence o debt is that you promise to make fxed payments in the uture (interest payments and repaying principal). I you ail to make those payments, you lose control o your business. The other is equity. With equity, you do get whatever cash ows are let over ater you have made debt payments. Aswath Damodaran 5 Global Patterns in Financing Aswath Damodaran 6 And a much greater dependence on bank loans outside the US Aswath Damodaran 7 Assessing the existing fnancing choices: Disney, Aracruz and Tata Chemicals 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 Owners 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 Aswath Damodaran 9 The Transitional Phases.. The transitions that we see at frms 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 frm, they will demand their Fair share and more oF the ownership oF the frm to provide equity. When a frm 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, frms have to consider issuance costs while managing their relations with equity research analysts and rat Aswath Damodaran 10 Measuring a frm ` s fnancing mix The simplest measure oF how much debt and equity a frm is using currently is to look at the proportion oF debt in the total fnancing. 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.Debt includes all interest bearing liabilities, short term as well as long term....
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This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

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cfpacket2a - Aswath Damodaran 1 Corporate Finance Lecture...

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