E mix of debt and equity financing to facilitate the

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Unformatted text preview: st of capital, which makes it important to understand whether the weighted average cost of capital can be minimized by selecting an optimal capital structure (i.e. mix of debt and equity financing). To facilitate the discussion consider first the characteristics of debt and equity. 8.1 Debt characteristics Debt has the unique feature of allowing the borrowers to walk away from their obligation to pay, in exchange for the assets of the company. “Default risk” is the term used to describe the likelihood that a firm will walk away from its obligation, either voluntarily or involuntarily. “Bond ratings” are issued on debt instruments to help investors assess the default risk of a firm. Debt maturity - Short-term debt is due in less than one year Long-term debt is due in more than one year Debt can take many forms: • • • • • • • Bank overdraft Commercial papers Mortgage loans Bank loans Subordinated convertible securities Leases Convertible bond 8.2 Equity characteristics...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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