Chapter 13 Corporate financing decisions and ECM S The do-it-yourself alternative In an efficient market investors will not pay others for what they can do equally well themselves. As we shall see, many of the controversies in corporate financing center on how well individuals can replicate corporate financial decisions The financial manager needs to ask the same question when considering whether it is better to issue debt or stock Seen one stock, seen them all
Chapter 13 Corporate— financing decisions and ECM – The do—it—yourself alternative In an efficient market investors will not pay others for what they can do equally well themselves. As we shall see, many of the controversies in corporate financing center on how well individuals can replicate corporate financial decisions. The financial manager needs to ask the same question when considering whether it is better to issue debt or stock. – Seen one stock, seen them all
Chapter 13 Corporate financing decisions and ECM S 13. An overview of corporate financing Patterns of corporate financing Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders. In most years there is a gap between the cash that companies need and the cash that they generate internally. This gap is the financial deficit Should a firm elect external financing, they may choose between debt or equity sources. Dose firms rely too much on internal funds?
Chapter 13 Corporate— financing decisions and ECM 13.6 An overview of corporate financing – Patterns of corporate financing • Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders. • In most years there is a gap between the cash that companies need and the cash that they generate internally. This gap is the financial deficit. • Should a firm elect external financing, they may choose between debt or equity sources. • Dose firms rely too much on internal funds?
Chapter 13 Corporate financing decisions and ECM S Has capital structure changed? We commented that in recent years firms have, in the aggregate, issued much more debt than equity. but is there a long-run trend to heavier reliance on debt finance? This is a hard question to answer in general, because financing policy varies so much from industry and from firm to firm The next table shows the aggregate balance sheet of all manufacturing corporations in the Us in 2001 So what is the book debt ratio? Because financial analysts sometimes focus on the proportions of debt and equity in long term financing
Chapter 13 Corporate— financing decisions and ECM • Has capital structure changed? We commented that in recent years firms have, in the aggregate, issued much more debt than equity. But is there a long—run trend to heavier reliance on debt finance? This is a hard question to answer in general, because financing policy varies so much from industry and from firm to firm. The next table shows the aggregate balance sheet of all manufacturing corporations in the US in 2001. So what is the book debt ratio? Because financial analysts sometimes focus on the proportions of debt and equity in long term financing
Chapter 13 Corporate financing decisions and ECM 5 Aggregate balance sheet for manufacturing corporations in the United States, 2001 (figures in Billions) Current assets s 1.547 Current liabilities $1,234 Fixed assets 2.361 Long term debt 1038 ess 166 Other long term 679 depreciation liabilities INet fixed assets 1,195 Total long term liabilities 1,717 Other long term Stockholders'equity 1951 Total assets 4,903 Total liabilities and 4,903 stockholders'equity
Chapter 13 Corporate— financing decisions and ECM Aggregate balance sheet for manufacturing corporations in the United States, 2001 (figures in Billions). Current assets $ 1,547 Current liabilities $ 1,234 Fixed assets 2,361 Long term debt 1,038 Less 1,166 Other long term 679 deprecication liabilities Net fixed assets 1,195 Total long term liabilities 1,717 Other long term 2,160 Stockholders' equity 1,951 Total assets 4,903 Total liabilities and 4,903 stockholders' equity
Chapter 13 Corporate financing decisions and ECM Debt 1.234+1717 debtratio 60 Total assets 4903 Long term liabilities s 1.717 47 Long term liabilities s+equity 1,717+1,95 The sum of long-term liabilities and stockholders equity is called total capitalization. Common stock Debt Financial market and institutions
Chapter 13 Corporate— financing decisions and ECM • The sum of long—term liabilities and stockholders’ equity is called total capitalization. – Common stock – Debt – Financial market and institutions .60 4,903 1,234 1,717 Total assets Debt = + debtratio = = .47 1,717 1,951 1,717 Long term liabilitie s equity Long term liabilitie s = + = +