金融 assignment 代写:公司的资本结构
According to Fridson and Alvarez (2002), the capital structure of a company is the extent to which the company finances its business through debt or equity, which is also known as leverage or gearing. When deciding whether to invest in a particular company, capital structure is a measurement to evaluate whether the company has a healthy financial condition. This chapter purports to understand the factors the decision makers consider when structuring the funding of the company and how the capital structure would give the potential investors signals about the financial fitness of the company.
4.2 General review about how a firm structures its financing, the trade of debt and equity.
4.2.1 Debt Financing and Equity Financing
Debt financing can take the form of bank loan or corporate bonds. The Debts have to be repaid to the investor after a certain period of time, usually with interest. Debt and its interests can take priority over equity in bankruptcy. And because debts are based on contracts between the firm and its investors, they are treated as expense for accounting purposes and therefore text deductible.
Investment by equity financing means that the investor gives the firm money in exchange for the ownership of shares in the company. Equity financing is less risky for the firm because it doesn’t have the obligation to repay the money invested. Advantage for the investor through this way of investment is that he would have a set of rights in the business of the firm. But the disadvantage is obvious too, its claim does not have tax advantage and the payment of dividends does not have priority in bankruptcy.
Hybrid security serves as a third type of financing method, which embraces characteristics of both debt financing and equity financing. The common example of hybrid securities would be convertible preferred stock holding which the investor would have to option of converting the securities into underlying shares on a specified future date at a particular conversion rate.
4.2.2 Theories about the relation between value of the firm and its capital structure
22.214.171.124 The MM theorem
Modigliani and Miller (1958) were the first to give out a comprehensive demonstration of the relation between the value of the firm and its capital structure. According to the MM theorem, in a hypothetical situation, where there are no taxes, no bankruptcy costs, and no agency costs and in an efficient market, the financing mix is irrelevant to the value of the company.
Although the hypothetical scenario of the MM theorem won’t exist in the real world, and the theorem did receive a lot of criticism about its applicability in the real world, it did set out a framework for finding the factors affecting the capital structure decision.
126.96.36.199 The debt-equity trade off
Advantages of financing through debts are mainly in two aspects: tax deduction and adding discipline to the management. As described above, because the interest of the debts should be paid before the firm is taxed, it is tax deductible. This tax deduction in effect saves money for the company for paying $10 million interest to the investor will generate no tax while paying the investor $10 million dividend will cost $ 2 million tax (assuming that the corporate tax is 20%) (Meziane, 2013).
It is said that ‘equity is a cushion while debt is a sword’ (Damodaran, 2013). The separation of management and ownership in the modern corporation structure tend to create the problem that the managements tend to prioritize their own interest over that of the shareholders’. Debt financing won’t come across such agency conflicts because the payment of interest and paying back the loan falls within the responsibilities of the management and if they fail to make prompt payment, the company is at risk of being declared bankrupt. In this sense, the directors will have more incentive to manage the company debts well.
Of course, there are considerable disadvantages of using debt as a financing method, which are in the form of bankruptcy cost, agency cost and loss of future financing flexibility (Jonathan et al. 2010).