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  • Capital Structure Presentation (Master Slide)

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    Thayabaran Munusamy
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    The document discusses capital structure and its effect on firms. It covers several key topics in 3 paragraphs or less: 1. It introduces capital structure theory, including the static tradeoff theory and pecking order theory. These theories examine the costs and benefits of different sources of financing. 2. It summarizes the advantages and disadvantages of the main sources of financing: equity financing and debt financing. Equity financing provides ownership but is costly, while debt financing is tax deductible but requires regular interest payments. 3. It describes factors firms consider in their capital structure decisions. Firms analyze cash flow ratios, profitability, and risks of financial distress when determining the optimal mixture of debt and equity. Too

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    The document discusses capital structure and its effect on firms. It covers several key topics in 3 paragraphs or less: 1. It introduces capital structure theory, including the static tradeoff theory and pecking order theory. These theories examine the costs and benefits of different sources of financing. 2. It summarizes the advantages and disadvantages of the main sources of financing: equity financing and debt financing. Equity financing provides ownership but is costly, while debt financing is tax deductible but requires regular interest payments. 3. It describes factors firms consider in their capital structure decisions. Firms analyze cash flow ratios, profitability, and risks of financial distress when determining the optimal mixture of debt and equity. Too

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    546 views15 pages

    Capital Structure Presentation (Master Slide)

    Uploaded by

    Thayabaran Munusamy
    The document discusses capital structure and its effect on firms. It covers several key topics in 3 paragraphs or less: 1. It introduces capital structure theory, including the static tradeoff theory and pecking order theory. These theories examine the costs and benefits of different sources of financing. 2. It summarizes the advantages and disadvantages of the main sources of financing: equity financing and debt financing. Equity financing provides ownership but is costly, while debt financing is tax deductible but requires regular interest payments. 3. It describes factors firms consider in their capital structure decisions. Firms analyze cash flow ratios, profitability, and risks of financial distress when determining the optimal mixture of debt and equity. Too

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as ppt, pdf, or txt
    of 15

    Capital Structure

    &
    Effect to firm

    Free Powerpoint Templates


    Page 1
    QUESTION OVERVIEW
    DISCUSSION TOPIC REFRESHMENT

    100% Debt 100% Equity


    CAPITAL STRUCTURE T
    E C
    F F I T
    E EF
    EN
    Mixture Templates
    Free Powerpoint B Page 2
    PRESENTATION OVERVIEW

    CONCLUSION 1 CAPITAL STRUCTURE THEORY


    6

    Capital
    FINANCIAL COMPANY 5
    ANALYSIS
    Structure 2 EQUITY FINANCING

    (company)

    CAPITAL STRUCTURE 4 3 DEBT FINANCING


    DECISION

    Free Powerpoint Templates


    Page 3
    CAPITAL STRUCTURE THEORY

    THEORY

    M&M PECKING ORDER


    • stating that the market value • Is an alternative to the static
    of a firm is determined by its theory.
    earning power and the risk of • Key element is that firms
    its underlying assets, and is prefer to use internal financing
    independent of the way it TRADE OFF whenever possible.
    chooses to finance its
    investments or distribute • deals with the cost of
    dividends. financial distress and agency
    • Two (2) propositions: cost.
    - Firm Value • corporations are funding by
    - WACC the mixture of debt and equity

    Free Powerpoint Templates


    Page 4
    EQUITY FINANCING
    EQUITY
    FINANCING

    ADVANTAGES DISADVANTAGES
    • start-up costs • power & control
    • prospectus • requirements
    • valuable business • demanding, costly and time
    assistance consuming
    • does not need immediate • Personnel to handle
    repayment and installment information reporting
    • not need to bear the interest • Hold periodic mailings and
    • no need to pledge assets to meetings with the investors
    the lender as collateral

    Free Powerpoint Templates


    Page 5
    DEBT FINANCING
    DEBT
    FINANCING

    ADVANTAGES DISADVANTAGES
    • Ownership
    • Tax – deductible • Credit rating
    • Lenders do not share • Pledge assets to the
    profits lender
    • No periodic mailings • Has to budget for the
    or meetings. principal and interest
    payment

    Free Powerpoint Templates


    Page 6
    CAPITAL STRUCTURE DETERMINANTS
    CASE
    ANALYSIS :
    Consult’n Cash
    FINANCIAL Flow
    Analy.
    INSTITUTION
    (BANKS) Capital
    Industry Structure
    Compare
    Determinants
    Impact
    On
    Risk Profit
    Consider’n

    Free Powerpoint Templates


    Page 7
    CASH FLOW ANALYSIS (RATIOs)
    Debt/equity ratio :

     Measure of firm’s financial


    leverage

    Total Liabilities
    Stockholder’s Equity

     High D/E ratio means:


    • Company’s aggressiveness
    in growth via debt
    financing
    • May result in volatility of
    earnings due to additional
    interest expense

    Free Powerpoint Templates


    Page 8
    CASH FLOW ANALYSIS (RATIOs)
    Cash Flow To Debt Ratio
    (CFTD)

     Measure of firms capability to


    overcome their debts at a
    specified period

    EBITDA
    Debts

     Higher CFTD indicates better


    firm

    Free Powerpoint Templates


    Page 9
    CASH FLOW ANALYSIS (RATIOs)
    Debt ratio :

     Measure of firms capability to


    overcome their debts via
    assets that are available

    Total Liabilities
    Total Assets

     Lower Debt ratio indicates


    better firms

    Free Powerpoint Templates


    Page 10
    PROFIT ANALYSIS

    Breakeven EBIT

     Indicates the point which


    differentiate profitability via
    stock and debt financing

     Shown as the yellow line in


    graph

    Free Powerpoint Templates


    Page 11
    PROFIT ANALYSIS (BANKS)

    Breakeven EBIT
     What is it ?
    - Analysis indicating stock financing or mix
    financing
     What is the accuracy level?
    -Indicates
    Free Powerpoint Templates
    higher debt better… Page 12
    -100% debt is NOT GOOD : financial distress
    RISK ANALYSIS
    IDEAL CASE :
     100% debt financing is the
    BEST (base on graph shown)

     WITH RISK …

     After a certain point, the cost


    increases exponentially due to
    agency and bankruptcy cost.
    (due to high interest cost)

    Free Powerpoint Templates


    Page 13
    RISK ANALYSIS (BANKS)
    RHB CASE ANALYSIS :

     2006 high D/E ratio compared


    to industry

     Almost bankrupt, M&A took


    place

    Free Powerpoint Templates


    Page 14
    CONCLUSION
    LEVERAGING A FIRM WITH DEBT FINANCING CAUSES :

     Increases expected ROE

     Increases variability of ROE

     Increases Risk of financial distress

    ANALYSIS FOR OPTIMAL CAPITAL STRUCTURE

     DO RATIO ANALYSIS

     DO BREAKEVEN ANALYSIS

     BE CAUTION OF RISK INVOLVED (TRAPPED IN FINANCIAL


    DISTRESS)

    Free Powerpoint Templates


    Page 15

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