MGT+3062+-+Financal+Leverage

MGT 3062 Financal - CapitalStructure 1 Objectives M& M&Mwithcorporatetaxes :5,1021,2325 :1,6,8

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1 Capital Structure
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2 Objectives Describe the costs and benefits of using debt Solve problems involving and describe the implications of: Recommended Exercises from Chapter 15: 5, 10-21, 23-25 Recommended Exercises from Chapter 16: 1, 6, 8
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3 Freedom Being a free man begins with financial freedom An empty bag cannot stand .”    - Ben Franklin The borrower is a slave to the lender ”  - Solomon
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4 First Steps to Financial Freedom 1. Pay yourself second 2. Pay off stupid debt
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5 Is it Stupid Debt? 1.  Does the borrower have a way out of debt? Can you sell the collateral to satisfy the debt? If your cash flow ceases (job loss) can you easily rid  yourself of this debt?
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6 Is it Stupid Debt? 2.  Will it hold its value for more than 3 years? Cars depreciate Real estate often appreciates (make your money on the  purchase, not the sale)
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7 Is it Stupid Debt? 3.  Will its value increase over time? 4.  Is the interest rate reasonable?
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8 Is it Stupid Debt? Vacation Clothes Car College Expenses Christmas Gifts Capital Equipment House Second Home Rental Property Wedding  Honeymoon Risky business idea
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9 The choices in corporate financing There are two primary ways in which a business can finance their investments: Debt:   You promise to make fixed payments in the future (interest payments and repaying the  principal).  If you fail to make those payments, you lose control of you business. Equity:   You get whatever cash flows are left over after you have made debt payments Equity can take different forms: For very small businesses: Owners investing their savings Slightly larger businesses: Venture capital Publicly traded firms: Common stock Debt can also take different forms: For private business: Bank loans For publicly traded firms: Bonds In our discussion of the cost of capital, the levels of debt and equity were given to us. This raises a the question: How do firms choose this mix to minimize their cost of capital?
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Measuring a firm’s financing mix (capital  structure) Simplest measure of how much debt and equity a firm is using is the proportion of  debt in the total financing: Debt-to-Capital ratio = Debt / (Debt + Equity) Note the following: Debt includes all interest bearing liabilities, short term as well as long term  debt Equity can be defined either in accounting terms (book value of equity) or in  market value terms (price × shares outstanding).  The resulting debt ratios can 
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This note was uploaded on 02/09/2012 for the course MGT 3078 taught by Professor Marchman during the Spring '12 term at Georgia Institute of Technology.

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MGT 3062 Financal - CapitalStructure 1 Objectives M& M&Mwithcorporatetaxes :5,1021,2325 :1,6,8

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