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CorporateFinanceCapitalStructure
JavierEstradaSpring,2014
1.Introduction• Wherearewegoing?
2.Tonka• Implications• Limitations
3.Polaroid• Costsoffinancialdistress• Agencycostsandcovenants• Implications
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
IntroductionWhatisthisallabout? Go
Findingthebest(cheapest)waytofinancethelong‐termprojectsofacompany• Whatfinancialinstruments,andinwhatproportions,minimizethecompany’scostofcapital?
• Optimalcapitalstructure xD andxE (orD/E)thatminimizetheWACC
Wewilldothisintwosteps Thepositivesideofdebt
• Thelimitationsoftheset‐up Thepositiveandnegative sidesofdebt
• Theprocessoffindinganoptimalcapitalstructure Go
2
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
RecapTonka:Assumptions Someareharmless,someareratherimplausible,andsomeareveryimplausible
Tonka:Results AsxD increases,whathappenswithnetincome,EPS,DPS,andtheshareprice?Moredebtcannotalways bebetter
• Theremust betrade‐offs Go
Tonka:UsefulnessWhatitshowsandwhatithides
Targetvariable Tonka:Stockprice(Maximize) Polaroid:Costofcapital(Minimize) Bothtargetsshouldleadtothesame(D/E)*
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
TheCostsofDebtCostsoffinancialdistress Twotypes Go
• Direct• Indirect
Typicallythoughtofasputtingdownwardpressureonthecompany’scashflows
Agencycosts Typicallythoughtofasputtingupwardpressureonthecostofdebt(RD)• Theroleofcovenants Go
Go‐Xls
3
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructureCriticalresult Ingeneralandinthecase
• TheevidenceclearlyindicatesthattheWACCisnotminimizedataAAAratingWhy?
Latesttrendsinratings Go
Non‐quantitativefactors Notonlyquantitativefactorsarerelevant
• Qualitativefactorsare(very)relevanttoo Go
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Appendix
4
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Introduction
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Introduction
5
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Introduction
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Introduction
Back
6
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Introduction
Back
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Trade‐Offs
7
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
Trade‐Offs
Back
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Direct
8
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Direct
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Direct
9
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Direct
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Indirect
Back
10
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
AgencyCosts– Covenants
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
AgencyCosts– Covenants
Back
11
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
12
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
13
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
14
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
OptimalCapitalStructure&Ratings
Back
15
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
QualitativeFactors
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
QualitativeFactors
Back
