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Financing decision思维导图

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查看详情Financing decision思维导图

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Financing decision思维导图模板大纲

debt finance cheaper than equity finance

debt is often secured

debt is often temporary

interest on debt finance is compulsory

debt ranks higher than equity under insolvency law

interest is tax deductible

capital structure theory

the traditional view of capital structure(图像)

At low levels of gearing

equity risk are unchanged , increase the proportion of cheaper debt will lower the WACC

At higher levels of gearing

increased financial risk;increase in Ke since risk increases ;WACC starts to rise

At very high levels of gearing

serious bankruptcy risk worries equity and WACC rises further

assumptions

No taxtion

The company pays out all its earnings as dividends

The earnings of the company are expected to remain constant in perpetuity

business risk is constant

capital employed in the business is constant

The are no transaction costs for issues

Modigliani & Miller -1958 theory with no taxation

The increase in ke exactly offests the benefit of the cheaper debt finance and the WACC remains unchanged

WACC and value of the firm are unaffected by changes in gearing levels

choice of finance is irrelevant to shareholder wealth

assumptions

No taxation

perfect captial markets

No transaction costs for issues

debt is risk free and freely available at the same cost to investors and companies

Modigliani&Miller-1963 theory with tax

context

debt interest is tax deductible so the overall cost of debt Kd to the company is lower than in M&M-no tax

The increase in Ke does not offest the benefit of the cheaper debt and therefore the WACC falls as gearing increases .

Geared companies have an advantages over ungeared companies

problems

Agency costs : restrictive covenants set by debtors-level of dividends,level of additional debt to raise,prevent firms investing

tax exhaustion : no tax to pay as interest covers all

increases in the cost of borrowing and cost of equity as gearing increases (direct financial distress costs .

Bankkruptcy risk from loss of sales/higher costs from suppliers

real world issues to gearing

static trade-off theory

firms maintain the level of gearing in a stable position which is set based on its specific business context

pecking-order theory

1.retained earnings

disadvantages

not enough cash flows

retained earnings should be used to pay dividends

advantages

do not have to spend any time persuading outside investorsn

no issue costs

2.debt

some degree of questioning and publicity

moderate issue costs

3.New issue of equity

extensive questioning and pubilcity

expensive issue costs

sign of a lack of confidence by directors that share price is overvalued .

A compromise approach

select a long run target gearing ratio

whilst far from target , decision should be govered by static trade-off theory

when close to target, pecking order theory will dictate source of funds .

gearing drift

their gearing level gredually reduces over times as accumulated profis help to increases the value of equity

revise mothed : issue debt , or paying a large dividend or buying back shares

signaling to investors

public issue of shares

advantages

eliminate the debt in the company

gain higher reputation

owners may sell or buy equity

easier to raise finance from a large number of investors

disadvantages

expensive and time-consuming

higher regulation and scrutiny

the threat of takeover increases

stock exchange listing requirement

Track record requirements , market capitalization ,share in public hands ,future prospects , audited historical financial information,corporate governance , acceptable accounting standards

delisting

removal of a listed security

not meet the listing requirements

Factors determine the level of gearing

directors preferences

concerned about too high a burden if payment to finance providers

a change in the shareholder base as a result of a share issue may impact upon their own position

the impression given by their choice of finance

cost and cash flows

more debt can get lower cost and tax relief

more debt also increased finance cost and rise cost of equity

interest payment is compulsory but dividends do not have to be paid

availability

equity issue time to arrange and require shareholder approval and has a significant debt the lenders will not borrowing

timescale over which finance is available may be significant .

mix

concerned about the gearing far from industry average

keeping debt as a significant element in overall finance may act as a deterrent to acquirers becoming interested in making a bid for us

directors may also not have a target figure

alternative methods of obtaininig a stock market listing

IPO

direct listing

without getting help from intermediaries . No support or guarantee for the share sales and no promotion of it

Dutch auctions (descending price auction)

advantages

institutional and smaller investors can be involved

more transparency

disadvantages

final price might not accurately reflect the company's prospects

special purpose acquisition companies(SPACs)

purpose of acquiring or merging

Dark pool trading systems

the trades are facilitated away from the central exchanges

a large block order on the open market , because of market forces is might prompt a changes in the price

problems

reduces the market efficiency

transparency is reduced

Mezzanine Debt

often these debt is unsecured . the risk and return is bigger than preference shares and smaller than ordinatry shares

suitable for small , high growth firms with high risk of default

crytocurrency

A cryptocurrency is a digital or virtual currency that uses cryptography for security . Based on the blockchain ledger

classification

initial coin offering (ICO)

It is securitied by new technology created by the project or accesss to services

no government regulation

Security token offering (STO)

It is securitied by real monetary value in the real world

higher government regulation

Islamic Finance

base principles

require fairness , no misleading or cheating

interest is forbidden in islamic finance

classification

Murabaha(trade credit/loan)

Ijara (lease finance)

Sukuk (islamic bonds)

mudaraba (equity finance )

Musharaka (venture captial)

Salam (forward contracts)

Istisna (long-term, large construction )

Green finance

investments in environmental goods and services

schemes that encourage sustainability

financeing foreign projects

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