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FINC-212 Study Guide - Quiz Guide: Capital Structure, Agency Cost, Capital Budgeting


Department
Finance
Course Code
FINC-212
Professor
Kate Waldock
Study Guide
Quiz

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FINC 212 – Capital Structure
Slides Pt. 2 (1-33)
Capital Structure: Choices and Trade-offs
- The two ways that a business can raise money
o Debt – A promise to make fixed payments in the future (interest payments and
repayment of principal, and if you fail to make payments, you lose control of your
business
Fixed Claim
Tax Deductible
High Priority in Financial Distress
Fixed Maturity
No Management Control
o Equity – A residual claim to all of the cash flows left over after debt payments
have been serviced.
Residual Claim
Not Tax Deductible
Lowest Priority in Financial Distress
Infinite
Management Control
o US Companies are in general much more dependent on bank loans than in Europe
- Transitional Phases
o Transitions between fully-owned private businesses to venture capital, from
private to public, and subsequent seasoned offerings are motivated by need for
capital
o Each transition incurs costs
Venture capitalists demand more equity to provide their capital
IPOs trade off increased disclosure requirements, loss of control, and
transaction costs of going public against the greater access to capital
markets
Seasoned offerings incur issuance costs and may damage relationships
with ratings agencies and equity research analysts
- Measurements of a Firm’s Financing Mix
o Debt to Capital Ratio = Debt / (Debt + Equity)
Debt includes all interest bearing liabilities, short term as well as long
term – should include any contractually pre-set payments that have to be
made, no matter what the firm’s financial standing
Equity can be either BV of equity or MV of equity
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