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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
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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
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JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
CostsofFinancialDistress– Direct
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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
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10
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
AgencyCosts– Covenants
JavierEstrada
IESEBusinessSchool
BarcelonaSpain
MBACorpFinSpring,2014
AgencyCosts– Covenants
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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
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