Debt or Equity by sofiaie

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									Debt or Equity?
            By
Professor Jonathan Welch
Characteristics of Debt and
Equity
                       Debt        Common Equity
    Maturity Date       Yes              No

       Claim           Prior
        On             Fixed          Residual
      Earnings         Legal

       Claim
        On             Prior          Residual
       Assets

      Voice          Impose             Elect
        In          Restrictions      Directors
    Management

    Investor Risk      Low              High

   Company Risk        High             Low

   Company Cost        Low              High
Financial Structure - Theory
      WACC




                         Debt Ratio
    MV of
 Debt & Equity




                         Debt Ratio
Financial Structure Check List -
Practical
   Business Risk
   Comparative Ratio Analysis
   Ability to Service Debt – Cash Budget
   Credit and Bond Rating (www.moodys.com)
   EPS, P/E, Pc Impacts
   Flexibility, and Future Financing
   Timing
   Ownership and Control
   Personal Wealth Effect
   Trial and Error
Average Ratios for Various Ratings of
Industrial Co’s
                             AAA/Aaa             AA/Aa   A/a     BBB/Baa
  Pre-tax Interest              13.7              8.8     4.1      2.9
     Coverage

  Debt to Capital              18.2%             30.0%   36.4%    40.3%

   Total Debt to                94%              114%    124%     129%
      Equity

  Working Capital              160%              87%     88%       95%
    to L.T.D.

   Cash Flow to                199%              91%     49%       34%
     LT Debt

   Current ratio                 1.4              1.5     1.7      1.9

  Pre-tax Margin               10.7%             11.1%   6.4%     5.8%

       ROE                     17.1%             18%     14%       11%

   Pre-tax ROC                 29.2%             29.7%   18.1%    15.6%

   Cash Flow to                 1 8%             111%    111%      98%
 Cap. Expenditures

Source: Merrill Lynch, “Fixed Income Research”

								
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