Big Picture - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

Download Big Picture - E-Commerce - Lecture Slides and more Slides Fundamentals of E-Commerce in PDF only on Docsity! CAPITAL  STRUCTURE:   FINDING  THE  RIGHT  FINANCING   MIX   You  can  have  too  much  debt…  or  too  liEle..   32 Docsity.com The Big Picture.. Chapters 7 & 8: Financing Choices and an Optimal Mix The Investment Decision The Financing Decision Invest in assets that earn a Find the right kind of debt _feturn greater than the for your firm and the right minimum acceptable hurdle mix of debt and equity to rate fund your operations If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business t Maximize the value of the business (firm) 33 3 Docsity.com 36 Measuring  Cost  of  Capital   36 ¨  Recapping  our  discussion  of  cost  of  capital:   ¨  The  cost  of  debt  is  the  market  interest  rate  that  the  firm  has  to  pay  on  its   long  term  borrowing  today,  net  of  tax  benefits.  It  will  be  a  funcNon  of:   (a)  The  long-­‐term  riskfree  rate   (b)  The  default  spread  for  the  company,  reflecNng  its  credit  risk   (c)  The  firm’s  marginal  tax  rate   ¨  The  cost  of  equity  reflects  the  expected  return  demanded  by  marginal   equity  investors.  If  they  are  diversified,  only  the  porNon  of  the  equity  risk   that  cannot  be  diversified  away  (beta  or  betas)  will  be  priced  into  the  cost   of  equity.   ¨  The  cost  of  capital  is  the  cost  of  each  component  weighted  by  its  relaNve   market  value.   ¨  Cost  of  capital  =  Cost  of  equity  (E/(D+E))  +  A_er-­‐tax  cost  of  debt  (D/(D+E))   Docsity.com 37 Costs  of  Debt  &  Equity   37 ¨  An  arNcle  in  an  Asian  business  magazine  argued  that   equity  was  cheaper  than  debt,  because  dividend   yields  are  much  lower  than  interest  rates  on  debt.   Do  you  agree  with  this  statement?   a.  Yes   b.  No   ¨  Can  equity  ever  be  cheaper  than  debt?   a.  Yes   b.  No   Docsity.com 38 Applying  Cost  of  Capital  Approach:  The   Textbook  Example   38 Assume the firm has $200 million in cash flows, expected to grow 3% a year forever. Docsity.com