...firm’s operating activity, and is directly related to the systematic risk of the firm’s assets. Financial risk is the equity risk that is due entirely to the firm’s chosen capital structure. As financial leverage, or the use of debt increases, so does financial risk and, hence, the overall risk of the equity. Business risk depends on a number of factors, including competition, liability exposure, and operating leverage. b.) In the total risk sense, one common measure of business and financial risk is the variability of ROE, also known as the standard deviation. c.) An unlevered firm's beta depends on the firm's business risk, but the use of financial leverage causes the firm's beta to increase. Thus, within a market risk framework: Total market risk = Business market risk - Financial market risk d.) Business risk is the single most important determinant of a firm's capital structure. The greater the risk inherent in a firm's assets, then, at any debt level, the greater the probability of financial distress for the firm. 2. a.) ( In the table) b.) (In the table) c.) . From the calculations, changing capital structure of the firm increases the risk of the firm so that leveraged firm has a wider range of ROE and a higher standard deviation of ROE .Thus, in the expected(base) case and in the expansion case, leveraged firm has higher returns(ROE) which implies higher profitability. 3.a.) Financial leverage adds risk to the firm’s equity. As compensation, the cost of equity...
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...Case Study 3 “Diageo, Plc.” Introduction บริษัท Diageo ถูกก่อตั้งขึ้นในปี 1997 จากการควบรวมกิจการระหว่างบริษัท Grand Metropolitan plc. กับบริษัท Guinness จนกลายเป็นบริษัทอาหารและเครื่องดื่มที่ใหญ่เป็นอันดับ 7 ของโลก หลังจากการควบรวมกันเป็นบริษัท Diageo ต้องการจะเน้นไปที่เครื่องดื่มแอลกอฮอล์เพียงอย่างเดียว จึงตัดสินใจที่จะขายธุรกิจอาหารไป ได้แก่ Pillsbury โดยขายให้กับ General Mills และต้องการจะออกจากธุรกิจ fast food โดยการออกขายหุ้น IPO ของ Burger King นอกจากนี้ บริษัท Diageo ยังเข้าซื้อกิจการประเภทแอลกอฮอล์ ได้แก่ Seagrams ทำให้บริษัทขยายใหญ่ขึ้นและมีความแข็งแกร่งทางด้านธุรกิจแอลกอฮอล์ ก่อนที่จะมีการควบรวมกิจการนั้น Guinness กับ Grand Metropolitan มี rating อยู่ที่ AA และ A ตามลำดับ แต่พอหลังการควบรวมกิจการเป็นบริษัท Diageo ทำให้มีถูกลด rating เหลือเพียง BBB โดยRating Agencies ได้แก่ Standard and Poor’s และ Moody’s เนื่องจากเกิดความไม่แน่นอนของนโยบายทางการเงินของบริษัท บริษัท Diageo จึงต้องควบคุม Capital Structure ให้มีประสิทธิภาพ โดยการรักษาระดับของ interest cover ratio ไว้ 5-8 เท่า และคงระดับของ EBITDA/Total Debt ให้อยู่ที่ 30% - 35%ถ้าบริษัท Diageo ต้องการรักษา rating ให้อยู่ที่ระดับ A+ นอกจากนี้บริษัทจะต้องใช้นโยบาย Trade-off Theory ซึ่งเป็นการเลือกระหว่างความเสี่ยงและผลตอบแทน กล่าวคือบริษัท Diageo ต้องเลือกระหว่างต้นทุนความล้มเหลวทางเงิน (Financial Distress)และผลประโยชน์ทางภาษี (Tax Shield) โดยสามารถคำนวณจากผลประโยชน์ทางภาษีในแต่ละปีและการประเมินความน่าจะเป็นที่จะเกิดความล้มเหลวทางการเงิน บริษัทมีการใช้ Monte Carlo Analysis ซึ่งใช้การวิเคราะห์แก้ปัญหาที่ยากหรือไม่สามารถแก้ปัญหาได้...
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...OF THE COURSE: FINANCE II CREDITS: 4 Name of the Faculty Arnab Bhattacharya Gaurav Singh Chauhan Kousik Guhathakurta Radha M. Ladkani Faculty Block/ Room No. J BLOCK C-102 A-106 J BLOCK Email Telephone Number arnabb@iimidr.ac.in gauravs@iimidr.ac.in kousikg@iimidr.ac.in; radhal@iimidr.ac.in; 0731-2439589 0731-2439592 0731-2439518 0731-2439698 COURSE DESCRIPTION The second core course in Finance deals with the core corporate finance functions in an applied setting. The participants are exposed to real world corporate finance decisions to be taken up by managers for creating value. Such an exposure is accomplished through a mix of theory and practice. The pedagogy employed reflects a judicious mix of case discussions, lectures and problem solving approach. COURSE OBJECTIVES The objective is to familiarize participants with the three major decision areas of Corporate Finance, viz. the investments, financing and earnings distribution decisions. Subsequently the participants are to be offered an integrated view of the decision areas by discussing the issues in corporate valuations and risk management. The course aims at sharpening the financial decision making skills of the participants. EXPECTED LEARNING OUTCOMES AND ASSOCIATED MEASURES At the end of the course student is expected to accomplish the following learning outcomes. Alignment of Course Learning Outcomes (CLOs) with the Programme Learning Goals & Objectives and Assessment...
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... This case examines the question of financial leverage at California Pizza Kitchen (CPK) in July 2007. With a highly profitable business and an aversion to debt, CPK management is considering a debt-financed stock buyback program. The case is intended to provide an introduction to the Modigliani-Miller capital structure irrelevance propositions and the concept of debt tax shields. With the background of a pizza company, the case provides an engaging context to discuss the “pizza graphs” that are commonly used in corporate finance curriculum to illustrate the wealth effects of capital structure decisions. The case serves to motivate the following teaching objectives: • Introduce the Modigliani-Miller intuition of capital structure irrelevance; • Establish how the cost of equity is affected by capital structure decisions by defining financial risk and introducing the levered-beta capital asset pricing model (CAPM) equation; • Discuss interest tax deductibility and the valuation tax shields; • Explore the importance of debt capacity in a growing business. Suggestion for Advance Assignment to Students Students may consider the following study questions: 1. In what ways can Susan Collyns facilitate the success of CPK? 2. Using the scenarios in case Exhibit 9, what role does leverage play in affecting the return on equity (ROE) for CPK? What about the cost of capital? In assessing the effect of leverage on the cost of capital, you may...
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...CASES IN FINANCIAL MANAGEMENT SYLLABUS FIN 522 Professor James A. Gentry Cases In Financial Management 343M Wohlers Hall Spring Semester 2009 333-7995 2043 BIF j-gentry@uiuc.edu Office Hours: 10:30 a.m. to 11:45 a.m. on Mon. and Wed/. or by Appointment I. Teaching Objectives Financial decision making cases are used to… • Create a highly interactive learning environment; • Learn about the application of financial management and credit analysis concepts; • Discover what you do not know about the practice of financial management; • Show what you have learned; • Highlight the relationships between strategic goals and the creation of firm value; • Develop techniques for interpreting a firm’s financial data and strategic plans; • Enhance your critical thinking and problem solving skills; • Expand your understanding of financial theory and its application; • Improve your listening and cooperative learning skills. II. Learning Promises At the end of this course your will be able to… • Think like a financial manager; • Interpret a company’s financial health by evaluating the performance...
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...Chapter 13 Capital Structure and Leverage LEARNING OBJECTIVES After reading this chapter, students should be able to: • Explain why capital structure policy involves a trade-off between risk and return, and list the four primary factors that influence capital structure decisions. Distinguish between a firm’s business risk and its financial risk. Explain how operating leverage contributes to a firm’s business risk and conduct a breakeven analysis, complete with a breakeven chart. Define financial leverage and explain its effect expected EPS, and the risk borne by stockholders. on expected ROE, • • • • • Briefly explain what is meant by a firm’s optimal capital structure. Specify the effect of financial leverage on beta using the Hamada equation, and transform this equation to calculate a firm’s unlevered beta, bU. Illustrate through a graph the premiums for financial risk and business risk at different debt levels. List the assumptions under which Modigliani and Miller proved that a firm’s value is unaffected by its capital structure, then explain trade-off theory, signaling theory, and the effect of taxes and bankruptcy costs on capital structure. List a number of factors or practical considerations firms generally consider when making capital structure decisions. Briefly explain the extent that capital structure varies across industries, individual firms in each industry, and different countries. • • • • Learning Objectives: 13 - 1 LECTURE SUGGESTIONS ...
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...Journal Of Financial And Strategic Decisions Volume 10 Number 3 Fall 1997 STRATEGIC ASSETS, CAPITAL STRUCTURE, AND FIRM PERFORMANCE Rahul Kochhar* Abstract Possession of strategic assets is a necessary condition for sustained competitive advantage. This condition is, however, not sufficient. Firms require financial management capability to realize the rents present in their strategic assets. The firm-specific nature of strategic assets implies that they be financed primarily through equity; other less specific assets should be financed through debt. Firms are likely to suffer increased costs and decreased performance if they do not adopt suitable governance structures in their transactions with potential suppliers of funds. INTRODUCTION The recently developed “resource-based view of the firm” seeks to focus the attention of researchers and managers alike on the unique and hard-to-copy strategic assets of the firm [7, 61]. Firms earn economic rents from these assets when there is an initial level of asymmetry in resource endowments, there is imperfect mobility of these assets, the market for these assets is imperfect, and competitors cannot easily obtain similar assets [2, 6, 7, 20, 24, 48]. Strategic assets provide the firm with a source of steady stream of rents so that it gains a sustained competitive advantage over its rivals. While researchers in this area have a general agreement over the characteristics of strategic assets (albeit adopting slightly different terminology...
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...Pont Proposed Capital Structure for Du Pont Corporation Uploaded by settypr on Jun 7, 2006 | | | Proposed Capital Structure for Du Pont Corporation The Du Pont Corporation was founded in 1802 to manufacture gunpowder. After nearly two centuries of operations, the company has greatly diversified its product base through acquisitions and research and development,, and is one of the largest chemical manufacturers in the world. In 1995, Du Pont had revenues of $42.2 billion and net income of $3.3 billion. In this same period, 50 percent of the company's sales were outside the United States. Du Pont operates in approximately 70 countries worldwide, with about 175 manufacturing and processing facilities that include 150 chemicals and specialties plants, five petroleum refineries, and 20 natural gas processing plants. The company has more than 60 research and development labs and customer service centers in the United States, and more than 20 labs in 10 other countries. Currently, Du Pont is the thirteenth largest U.S. industrial/service corporation (Fortune 500). Until the 1960's, the company's capital structure had historically been very conservative, with the corporation carrying little debt (Figure 1). This was possible primarily because of the enormous success of the company. However, in the late 1960's, competition for Du Pont had increased considerably, and the company experienced decreased gross margins and return on capital Figure 1. The capital structure of the Du Pont company...
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...and Daves Financial Management Cases. Supplemental Readings: Study Guide. Course Objectives: To review the theoretical concepts in Corporate Finance and improve financial administration skills through projects problem solving and cases. Lectures, Projects, cases and problem solving approaches will be used to achieve the course objectives. Grading: Grade Percent Points Exams 200 points Excellent 80+ Group Work and Cases 100 points Good 70-79.9 Participation, Indiv. Cases 100 points Average 60-69.9 TOTAL 400 points Passing 50-59.9 Fail Below 50 Percentage Score 400/4=100 You will be penalized for absence, lack of participation or poor performance on reading assignments case assignments and problem assignments You are required to read the assigned chapters and finish the mini case assignments before the class discussion of the assignments. Additional readings and problems may be assigned as needed to supplement the text book. * EACH GROUP WILL TURN IN SIX WRITTEN CASE FOR GRADING PRIOR TO PRESENTATION. Written Case as well as Presentation will be graded. Individual grade for group work will include peer grading of group members. (100 points). - Grade for participation is based on in class attendance, in class performance in cases and class discussion, peer grading,...
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...11/3/2008 FIN720 | Baitshepi Tebogo| 9302747|MBA | term paper | CAPITAL STRUCTURE AND DIVIDEND POLICY DISCUSSION: How does Standard Chartered Bank Botswana contribute to this discussion? | TABLE OF CONTENTS Abstract 3 Historical Background 4 Literature Review 6 Research Objectives 21 Methodology 22 Challenges 23 Methods 24 Data Analysis 25 Conclusion and Recommendations 27 References 28 Appendices 32 ABSTRACT The paper begins by highlighting the historical background of Standard Chartered Bank, and its evolution over the years, and how it eventually got to set up in business in Botswana. After this, the paper delves into the capital structure and dividend policy theories at length. The theories are at first discussed separately, and then meticulously blended as the report progresses. In addition, after a more general discussion, the topic is narrowed down to reflect on the capital structure subsisting under a banking environment. Empirical evidence from Standard Chartered Bank Botswana is then presented to assist future researchers reflect on how it stands against conventional theory. The result of the empirical study shows positive correlation between capital structure and dividend payment; and an even stronger correlation is evident between earnings per share and dividend payment. The paper, however, ends by recommending further studies using larger...
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...Part A Fundamental Analysis: Company Overview: Southern skylights Inc. starts its business plan with a new design of prefabricated skylight that could be mass produced and sold profitably at a significant lower cost than custom units. Chris Marcella, an architect and founder of Skylights is planning to construct the capital structure of the company with co-founders. Economy analysis: Investors must make judgments about the financial markets both in the current scenario as well as in the future scenario. Stock prices are one of the leading indicators that typically lead the economy. So we are trying to start by assessing the company’s optimal capital structure that would affect stock prices. In this case, we have seen three types of scenario (Pessimistic, Most likely, Optimistic) have been developed by the financial analyst. From the very beginning the company is concerned about the financing as well as production planning. According to the financial analyst of the company there are two types of production plans (Plan-A & Plan-B) available for the company. On the other hand for initial capital the company is planning for taking debt, issuing share to outside investors ($10 per share). The founders also agree for their initial investments ($0.10 per share). We will analyze how much equity and debt could maximize the firm’s value. We will also analyze what production plan could bring good earnings at tolerable level of risks. Industry analysis: The purpose of industry...
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...Bringham (2003), the value of a business based on the going concern expectation is the present value of all the expected future cash flows to be generated by the assets, discounted at the company’s weighted average cost of capital (WACC). From this it can be seen that the WACC has a direct impact on the value of a business. (Johannes and Dhanraj, 2007). The choice between debt and equity aims to find the right capital structure that will maximize stockholder wealth. Debt policy and equity ownership structure “matter” and the way in which they matter differs between firms with many and firms with few positive net present value project (McConnel and Servaes, 1995). Leland and Pyle (1977) propose that managers will take debt equity ratio as a signal, by the fact that high leverage implies higher bankruptcy risk (and costs) for low quality firms. Since managers always have information advantage over the outsiders, the debt structure may be considered as a signal to the market. Ross’s (1977) model suggests that the values of firms will rise with leverage, since increasing the market’s perception of value. Under some conditions capital structure does not affect the value of the firm. Splitting a fund into some mix of shares relating to debt, dividend and capital directly adds value to the company (Gemmille, 2001).Firms has increased their level of debt relative to their profit. As a result, firm debt in general has risen substantially. They found that those firms having lower debt...
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...Midland Energy Resources, Inc.: Cost of Capital Analysis TABLE OF CONTENTS I. EXECUTIVE SUMMARY ........................................................................................ 2 II. COMPONENT ESTIMATIONS ............................................................................... 2 1. Effective Tax Rate - t ............................................................................................. 2 2. Capital Structure – D/E ......................................................................................... 3 3. Cost of Debt - r" .................................................................................................... 3 Exploration & Production (E&P) ................................................................................ 3 Refining and Marketing (R&M).................................................................................. 4 Petrochemicals ......................................................................................................... 4 4. Cost of Equity -r# ................................................................................................... 4 1) r$ ........................................................................................................................ 4 2) βlevered ............................................................................................................. 4 Exploration & Production (E&P) .................................................................
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...Global Economic Review Vol. 37, No. 1, 107Á123, March 2008 Performance and Capital Structure of Privatized Firms in Europe ´ ´ MARIA JOSE ARCAS & PATRICIA BACHILLER Faculty of Economics and Business Administration, Department of Accounting and Finance, University of Zaragoza, Zaragoza, Spain ABSTRACT The objective of this paper is to analyze whether there are differences in performance between private firms and recently privatized firms in the European Union, as well as to determine whether ownership (state-owned versus private) and regulation affect capital structure. Focusing on economic reasons that justify privatizations, we analyze whether there are differences between recently privatized state-owned enterprises (SOEs) and private firms in their profitability, leverage and efficiency during the period 1999Á2002. Also, we analyze the determinants of the capital structure of these firms. Contrary to previous studies, our results show that privatized firms are not less efficient than firms with private ownership. KEY WORDS: Privatization, efficiency, capital structure, regression, Wilcoxon test Summary In recent decades, the privatization of state-owned enterprises (SOEs) has been one of the most common policies carried out in economies worldwide and the Organization for Economic Cooperation and Development (OECD) countries have also been involved in this phenomenon. Many studies have focused on the impact of privatization on the performance of the privatized firms...
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...The Application of FRICTO Analysis to Making Financing Decisions in Practice: Two Case Examples in Australia George W. Kester, Washington and Lee University Jamie Mckellar, Thiess Pty Ltd Jeremiah Mulcahy, BHP Billiton Ltd This paper describes the use of the FRICTO analytical framework for comparing financing alternatives and making financing decisions. Two case examples in Australia are presented to illustrate how two former investment bankers have used the FRICTO framework to help clients make financing decisions that take into account flexibility, risk, income, control, timing and other considerations. They have found the analytical framework prompts decision-makers to consider other important issues beyond risk and the effect on earnings per share that reflect a company’s unique and often complicated circumstances. INTRODUCTION Modigliani and Miller (1958) advanced the proposition that based upon several simplifying assumptions, capital structure has no effect on the value of a firm. However, recognizing the impact of taxes, bankruptcy, agency costs, and asymmetric information, capital structure theory has evolved to acknowledge that the use of debt does affect the value of a firm. Modern theories of capital structure can be classified into two categories: “static tradeoff models” and the “pecking order hypothesis.” Static tradeoff models imply an optimal debtequity mix which is determined by a tradeoff between the benefits and costs of debt (i.e., balancing the tax...
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