Raghav Pokharel

Scott and Johnson, Financing In Large Corporations 1. Introduction: y This paper provides some information concerning financial-decision process of large corporations. y The data were gathered from a questionnaire that was mailed to the chief financial officer of each firm in the 1979 Fortune 1000 list.

2. Financial Leverage Metrics: y Firm use target financial leverage ratios as input to making financing decisions. y The most important influence on these targets is the firms own management group and staff of analysts. y Several ratios are used by corporations to measure leverage especially: o Long term debt to total capitalization. o Times interest earned. o Long-term debt to net worth. y Most firms use book value principle against the market value principle as prescribed by financial academicians.

3. Optimal Capital Structure and Debt Capacity: y It is clearly evident that participating executives subscribe to the concept of an optimal capital structure. y Executives believe that prudent use of debt can lower the firms overall cost of capital and that debt-use can affect common stock price. y The preference of financial decision makers in long term debt to total capitalization ratios that fall predominantly into 26-40 percentage range. y The participating financial executives overtly accept the concept of a corporate debt capacity and maintain rather precise definitions of it. y The most popular definition was some management determined limit on the firms debt to total capitalization ratio. y Balance sheet based definition of debt capacity for 36 percent of the First 500 respondents and for the 50 percent of the Second 500 respondents. y y The desire to maintain a given bond rating was a popular notion among the participating financial executives. Neither highly sophisticated interpretations of debt capacity, nor attempts to measure it, were evidenced in practice by the survey results.