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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.
- 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
Subordinated convertible securities
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.
- Spring '12