Introduction What is this all about? Javier Go Estrada Finding - - PDF document

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Introduction What is this all about? Javier Go Estrada Finding - - PDF document

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Corporate Finance Capital Structure Javier Estrada Spring, 2014 1. Introduction Where are we going? 2. Tonka Implications Limitations 3. Polaroid Costs of financial distress Agency costs and covenants Implications

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Corporate Finance

Capital Structure

Javier Estrada Spring, 2014

  • 1. Introduction
  • Where are we going?
  • 2. Tonka
  • Implications
  • Limitations
  • 3. Polaroid
  • Costs of financial distress
  • Agency costs and covenants
  • Implications

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

  • What is this all about?

Go

  • Finding the best (cheapest) way to finance the long‐

term projects of a company

  • What financial instruments, and in what proportions,

minimize the company’s cost of capital?

  • Optimal capital structure

 xD and xE (or D/E) that minimize the WACC

  • We will do this in two steps
  • The positive side of debt
  • The limitations of the set‐up
  • The positive and negative sides of debt
  • The process of finding an optimal capital structure

Go

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Recap

  • Tonka: Assumptions
  • Some are harmless, some are rather implausible,

and some are very implausible

  • Tonka: Results
  • As xD increases, what happens with net income,

EPS, DPS, and the share price?

  • More debt cannot always be better
  • There must be trade‐offs

Go

  • Tonka: Usefulness
  • What it shows and what it hides
  • Target variable
  • Tonka: Stock price (Maximize)
  • Polaroid: Cost of capital (Minimize)
  • Both targets should lead to the same (D/E)*

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

The Costs of Debt

  • Costs of financial distress
  • Two types

Go

  • Direct
  • Indirect
  • Typically thought of as putting downward pressure
  • n the company’s cash flows
  • Agency costs
  • Typically thought of as putting upward pressure on

the cost of debt (RD)

  • The role of covenants

Go Go‐Xls

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure

  • Critical result
  • In general and in the case
  • The evidence clearly indicates that the WACC is not

minimized at a AAA rating

 Why?  Latest trends in ratings

Go

  • Non‐quantitative factors
  • Not only quantitative factors are relevant
  • Qualitative factors are (very) relevant too

Go Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Appendix

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

Back

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Introduction

Back Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Trade‐Offs

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Trade‐Offs

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Costs of Financial Distress – Direct

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Costs of Financial Distress – Direct

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Costs of Financial Distress – Direct

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Costs of Financial Distress – Direct

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Costs of Financial Distress – Indirect

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Agency Costs – Covenants

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Agency Costs – Covenants

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Optimal Capital Structure & Ratings

Back

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Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Qualitative Factors

Javier Estrada IESE Business School Barcelona Spain MBA CorpFin Spring, 2014

Qualitative Factors

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