Capital Structure - Chapter 12 Capital structure policy 1...

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Chapter 12 Capital structure policy 1
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Table of Contents 1. The nature of capital structure policy 2. Methods of raising equity finance 2.1 Initial Public Offering (IPO) 2.2 Rights issues 2.3 Private placements 3 Sources of debt finance 3.1 Intermediated Finance 3.2 Non Intermediated Finance 3.2.1. Commercial bills 3.2.2. Promissory notes 3.2.3. Unsecured notes 3.2.4 Debentures 3.2.5 Hybrid instruments 4. The impact of capital structure policy on company value 4.1 The conditions under which capital structure is irrelevant 4.2 Capital Structure Relevance 4.2.1 Why capital structure policy is relevant 4.2.2 What about tax? 4.2.3 Financial Distress 2
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1. What is capital structure policy? Capital structure relates to How to finance the company’s assets by an optimal mix of debt and equity The focus is usually on debt, which is referred to as ‘leverage’ or ‘gearing’ Leverage can be measured by D/E Where D = market value of interest bearing debt and E = market value of equity However, The market value of debt (D) is not typically observable, because debt securities are not often listed on the ASX 3
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The leverage or gearing of a company can be measured using a leverage ratio, as follows: Consider one of the largest industrial companies on the ASX, Wesfarmers Ltd: What types of securities might Wesfarmers Ltd use to manage their target leverage ratios, and how it can raise capital from the equity market? What are the implications for the wealth of its shareholders resulting from adopting a particular target leverage ratio? Leverage ratio net debt market capitalisation of equity (12.1) 4 1. What is capital structure policy?
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The net debt to equity ratio of Wesfarmers Ltd TABLE 12.1 5 1. What is capital structure policy?
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Table of Contents 1. The nature of capital structure policy 2. Methods of raising equity finance 2.1 Initial Public Offering (IPO) 2.2 Rights issues 2.3 Private placements 3 Sources of debt finance 3.1 Intermediated Finance 3.2 Non Intermediated Finance 3.2.1. Commercial bills 3.2.2. Promissory notes 3.2.3. Unsecured notes 3.2.4 Debentures 3.2.5 Hybrid instruments 4. The impact of capital structure policy on company value 4.1 The conditions under which capital structure is irrelevant 4.2 Capital Structure Relevance 4.2.1 Why capital structure policy is relevant 4.2.2 What about tax? 4.2.3 Financial Distress 6
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2. Methods of raising equity finance Companies listed on the ASX are known as limited liability companies and carry the extension ‘Limited’ or ‘Ltd’ after their name Their share capital is usually in the form of ordinary shares Characteristics of ordinary shares: They have an infinite life They pay dividends, which are set annually They carry voting rights at the AGM Shareholders are the last to be paid in the event of company failure 7
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When a company desires to raise capital after it has been formed, it engages in an ‘initial public offering, IPO’ or ‘float’, and is then ‘listed’ on the ASX
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This note was uploaded on 03/09/2012 for the course FINC corporate taught by Professor Kim during the Three '11 term at University of Sydney.

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Capital Structure - Chapter 12 Capital structure policy 1...

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