Principles of Finance · free preview
Choosing the Capital Structure
The optimal capital structure balances the tax shield of debt against the rising costs of financial distress, and real firms weigh industry stability, asset tangibility, growth options, and market conditions when setting their target mixes.
1. The trade-off theory
The trade-off theory
2. What shifts the optimum
What shifts the optimum
3. Alternative funding sources
Alternative funding sources
4. Structure as a managed policy
Structure as a managed policy
5. The trade-off's balance
According to the trade-off theory, when should a firm stop adding debt to its structure?
6. Tangibility's effect
Why do firms with tangible assets typically carry more debt than firms whose value is intangible?
7. Growth options and leverage
Why do growth-option-rich firms typically keep their structures conservative?
8. The U-shaped WACC
Why does the WACC fall and then rise as leverage increases?
9. Convertible bonds' sweetener
Why can a firm issue convertible bonds at a lower coupon than plain bonds?
10. Target structure management
What does it mean to manage drift toward a target structure?
11. The benefit side
What two-word term names the tax saving from deductible interest, the benefit side of the trade-off? Answer in lowercase.
12. The cost side
What two-word term names the direct and indirect costs of approaching and entering default, the cost side of the trade-off? Answer in lowercase.
13. The convertible feature
What one-word term names the holder's right to exchange a convertible bond for equity? Answer in lowercase.
14. The quietest funding
What one-word term names earnings kept in the firm rather than distributed, the least disruptive funding source? Answer in lowercase.
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