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Chapter 14 Capital Structure Decisions Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 14–1 Prepared by Dr Buly Cardak Learning Objectives • Outline empirical evidence from recent studies on capital structure. • Assess the implications of the evidence for the trade-off, pecking order and free cash flow theories. • Explain how financing can be viewed as a marketing problem. • Outline the main factors that financial managers should consider when determining a company’s financing strategy. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 14–2 Prepared by Dr Buly Cardak Introduction • MM analysis is useful in showing that if capital structure is important, the reasons must relate to factors that MM excluded by their assumptions. • Four main theories of capital structure: – MM leverage irrelevance — company value depends on investment rather than financing decisions. – Trade-off theory — emphasises tax benefits of debt. – Pecking order theory — information on projects is asymmetric and internal finance is highest in pecking order. – Free cash flow theory — emphasises agency costs with the discipline of debt reducing unprofitable investment. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 14–3 Prepared by Dr Buly Cardak Company Financing: Some Initial Facts • In the US, most investment by non-financial companies is financed from internal cash flows, followed by external debt finance and then by equity. • The pattern in Australia is similar, with over 50% of finance coming from internal equity over 2000–2004. • High-growth companies have investment needs that exceed cash flow and, as a result, these high-growth companies depend heavily on share issues (equity finance). Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 14–4 Prepared by Dr Buly Cardak Company Financing: Some Initial Facts (cont.) • Relationships between industry characteristics and capital structure have been reported in several studies. – Paper, steel and airline companies typically have high leverage. – Pharmaceutical and electronics companies typically have low leverage. • These observations suggest that capital structure decisions are important. Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Business Finance 9e by Peirson, Brown, Easton, Howard and Pinder 14–5 Prepared by Dr Buly Cardak ... - tailieumienphi.vn
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