Principles of Managerial
Finance
9th Edition
Chapter 12
Leverage & Capital Structure
Learning Objectives
• Discuss the role of breakeven analysis, how to
determine the operating breakeven point, and the
effect of changing costs on the breakeven point.
• Understand operating, financial, and total leverage
and the relationship among them.
• Describe the basic types of capital, external
assessment of capital structure, capital structure of
non-U.S. firms, and capital structure theory.
Learning Objectives
• Explain the optimal capital structure using a graphic
view of the firm’s cost of capital functions and a
modified form of zero-growth valuation model.
• Discuss the graphic presentation, risk considerations,
and basic shortcomings of EBIT-EPS approach to
capital structure.
• Review the return and risk of alternative capital
structures and their linkage to market value, and other
important capital structure considerations.
Leverage
Sales revenue和
EBIT之間的關係
Sales revenue和
EPS之間的關係
EBIT和EPS
之間的關係
Breakeven Analysis
• Breakeven (cost-volume-profit) Analysis is used to:
– determine the level of operations necessary to
cover all operating costs, and
– evaluate the profitability associated with various
levels of sales.
• The firm’s operating breakeven point (OBP) is the
level of sales necessary to cover all operating
expenses.
• At the OBP, operating profit (EBIT) is equal to zero.
Breakeven Analysis
• To calculate the OBP, cost of goods sold and
operating expenses must be categorized as fixed or
variable.
• Variable costs vary directly with the level of sales and
are a function of volume, not time.
• Examples would include direct labor and shipping.
• Fixed costs are a function of time and do not vary with
sales volume.
• Examples would include rent and fixed overhead.
Breakeven Analysis
Algebraic Approach
• Using the following variables, the operating portion of
a firm’s income statement may be recast as follows:
P =
Q =
FC =
VC =
sales price per unit
sales quantity in units
fixed operating costs per period
variable operating costs per unit
EBIT = (P x Q) - FC - (VC x Q)
• Letting EBIT = 0 and solving for Q, we get:
Breakeven Analysis
Algebraic Approach
• Using the following variables, the operating portion of
a firm’s income statement may be recast as follows:
P =
Q =
FC =
VC =
sales price per unit
sales quantity in units
fixed operating costs per period
variable operating costs per unit
Q =
FC
P - VC
Breakeven Analysis
Algebraic Approach
Breakeven Analysis
Algebraic Approach
• Example: Omnibus Posters has fixed operating costs
of $2,500, a sales price of $10/poster, and variable
costs of $5/poster. Find the OBP.
Q =
$2,500 = 500 posters
$10 - $5
• This implies that if Omnibus sells exactly 500 posters,
its revenues will just equal its costs (EBIT = $0).
Breakeven Analysis
Algebraic Approach
• We can check to verify that this is the case by
substituting as follows:
EBIT = (P x Q) - FC - (VC x Q)
EBIT = ($10 x 500) - $2,500 - ($5 x 500)
EBIT = $5,000 - $2,500 - $2,500 = $0
Breakeven Analysis
Graphic Approach
EBIT at Various Levels of Quantity Sold
Quantity
Total
Total
Total
Total
Sold
Revenue
Costs
FC
VC
0
0
2,500
2,500
0
500
5,000
5,000
2,500
2,500
0
1,000
10,000
7,500
2,500
5,000
2,500
1,500
15,000
10,000
2,500
7,500
5,000
2,000
20,000
12,500
2,500
10,000
7,500
2,500
25,000
15,000
2,500
12,500
10,000
3,000
30,000
17,500
2,500
15,000
12,500
EBIT
(2,500)
Breakeven Analysis
Total Revenue
Total Costs
Total FC
14,000
revenue/costs ($)
12,000
EBIT>0
10,000
8,000
6,000
Operating breakeven point
4,000
2,000
EBIT<0
-
500
1,000
sales (posters)
1,500
2,000
Operating & Financial Leverage
Operating & Financial Leverage
Effects of Leverage on the Income Statement
Net Sales
Scenario 1
Scenario 2
Scenario 3
10% Sales
Sales Rem ain
10% Sales
Decrease
Unchanged
Increase
$
630,000
$
700,000
$
770,000
Less: Variable Costs
(60% of Sales)
378,000
420,000
462,000
200,000
200,000
200,000
EBIT
52,000
80,000
108,000
Less: Interest Expense
20,000
20,000
20,000
EBT
32,000
60,000
88,000
9,600
18,000
26,400
Less: Fixed Costs
Less: Taxes (30%)
Net Incom e
$
22,400
$
42,000
$
61,600
Operating & Financial Leverage
Degree of Operating Leverage
• operating leverage=the potential use of fixed operating costs to
magnify the effects of changes in sales on the firm’s EBIT
• The degree of operating leverage (DOL) measures the
sensitivity of changes in EBIT to changes in Sales.
• A company’s DOL can be calculated in two different ways:
One calculation will give you a point estimate, the other will
yield an interval estimate of DOL.
• Only companies that use fixed costs in the production process
will experience operating leverage.
Operating & Financial Leverage
Degree of Operating Leverage
Effects of Operating Leverage on the Income Statement
Scenario 1
Scenario 2
Sales Decrease Sales Rem ain
10.0%
Net Sales
$
630,000
Scenario 3
Sales Increase
Unchanged
$
700,000
10.0%
$
770,000
Less: Variable Costs
(60% of Sales)
Less: Fixed Costs
EBIT
378,000
420,000
462,000
200,000
200,000
200,000
52,000
80,000
108,000
Ebit Decreases
Ebit Increases
35.0%
35.0%
Operating & Financial Leverage
Degree of Operating Leverage
DOL愈大表示operating risk愈大，DOL>1表示有operating leverage
Interval Estimate of DOL
DOL = % Change in EBIT = 35%
% Change in Sales
10%
= 3.50
Because of the presence of fixed costs in the firm’s
production process, a 10% increase in Sales will result in
a 35% increase in EBIT. Note that in the absence of
operating leverage (if Fixed Costs were zero), the DOL
would equal 1 and a 10% increase in Sales would result
in a 10% increase in EBIT.
Operating & Financial Leverage
Degree of Operating Leverage
Point Estimate of DOL
當FC相對於VC愈大時，DOL也愈大，例如：公司決定增加sales的salary
，減少sales commission
DOL =
Sales - VC
Sales - VC - FC
=
700 - 420
700 - 420 - 200
= 3.50
Care must be taken when using the point estimate
because the DOL will be different at different levels of
sales. For Example, if sales increase to 770, DOL will
decline as follows:
DOL =
Sales - VC
Sales - VC - FC
=
770 - 462
770 - 462 - 200
= 2.08
Operating & Financial Leverage
Degree of Financial Leverage
• Financial leverage=potential use of fixed financial costs to
magnify the effects of changes in EBIT on the firm’s EPS
• The degree of financial leverage (DFL) measures the sensitivity
of changes in EPS to changes in EBIT.
• Like the DOL, DFL can be calculated in two different ways:
One calculation will give you a point estimate, the other will
yield an interval estimate of DFL.
• Only companies that use debt or other forms of fixed cost
financing (like preferred stock) will experience financial
leverage.
*兩種fixed financing costs: interest expense與preferred stock dividend
Operating & Financial Leverage
Degree of Financial Leverage
Effects of Financial Leverage on the Income Statement
Scenario 1
Scenario 2
Scenario 3
EBIT Dcrease
Sales Rem ain
EBIT Increase
35.00%
Unchanged
35.00%
EBIT
52,000
80,000
108,000
Less: Interest Expense
20,000
20,000
20,000
EBT
32,000
60,000
88,000
9,600
18,000
26,400
Less: Taxes (30%)
Net Incom e
$
22,400
$
42,000
$
61,600
EPS (42,000 shares)
$
0.53
$
1.00
$
1.47
EPS Decreases
46.67%
EPS Increases
46.67%
注意：若有特別股存在，則這裡要再減去特別股股利
Operating & Financial Leverage
Degree of Financial Leverage
Interval Estimate of DFL
DFL = % Change in EPS = 46.67% = 1.33
% Change in EBIT
35.00%
In this case, the DFL is greater than 1 which
indicates the presence of debt financing. In
general, the greater the DFL, the greater the
financial leverage and the greater the financial risk.
Operating & Financial Leverage
Degree of Financial Leverage
Point Estimate of DFL
DFL =
EBIT
= 80
EBIT - Interest
80 - 20
= 1.33
DFL =
EBIT
= 108
= 1.23
EBIT - Interest
108 - 20
In this case, we can see that the DFL is related to the
expected level of EBIT. However, the DFL declines if the
firm performs better than expected. Note also, however,
that the DFL will rise if the firm performs worse than
expected.
若有preferred stock，則公式為
DFL 
EBIT
EBIT  Interest 
PD
1
Operating & Financial Leverage
Degree of Total Leverage
Effects of Combined Leverage on the Income Statement
Net Sales
$
Scenario 1
Scenario 2
Scenario 3
10% Sales
Sales Rem ain
10% Sales
Decrease
Unchanged
Increase
630,000
$
700,000
$
770,000
Less: Variable Costs
(60% of Sales)
378,000
420,000
462,000
200,000
200,000
200,000
EBIT
52,000
80,000
108,000
Less: Interest Expense
20,000
20,000
20,000
EBT
32,000
60,000
88,000
9,600
18,000
26,400
Less: Fixed Costs
Less: Taxes (30%)
Net Incom e
$
22,400
$
42,000
$
61,600
EPS (42,000 shares)
$
0.53
$
1.00
$
1.47
EPS Decreases
46.67%
EPS Increases
46.67%
Operating & Financial Leverage
Degree of Total Leverage
Interval Estimate of DTL
DTL = % Change in EPS =
% Change in Sales
46.7%
10%
= 4.67
In this case, the DTL is greater than 1 which indicates the
presence of both fixed operating and fixed financing
costs. In general, the greater the DTL, the greater the
financial leverage and the greater the operating leverage.
Operating & Financial Leverage
Degree of Total Leverage
Point Estimate of DTL
DTL = DOL x DFL =
Q x (P - VC)
x
Q x (P-VC) - FC
DTL =
EBIT
=
EBIT – I - [PD/(1-t)]
700 – 420
=
Q x (P-VC)
EBIT- I - [PD/(1-t)]
4.67
700 - 420 - 200 - 20 - 0
At our base level of sales of 700, the point estimate gives
us the same result we obtained using the interval
estimate.
Operating & Financial Leverage
Degree of Total Leverage
The relationship between the DTL, DOL, and
DFL is illustrated in the following equation:
DTL = DOL x DFL
Applying this to our example at a sales level of
$770, we get:
DTL = 3.50 x 1.33 = 4.6
Which is the same result we obtained using either
the point or interval estimates at that sales level.
The Firm’s Capital Structure
• Capital structure is one of the most complex areas of
financial decision making due to its interrelationship
with other financial decision variables.
• Poor capital structure decisions can result in a high
cost of capital, thereby lowering project NPVs and
making them more unacceptable.
• Effective decisions can lower the cost of capital,
resulting in higher NPVs and more acceptable
projects, thereby increasing the value of the firm.
Types of Capital
Internal Assessment of Capital Structure
High business risk
industry tends to maintain
a lower financial risk
Lower business risk
industry tends to have
a higher financial risk
Capital Structure of Non-U.S. Firms
• In recent years, researchers have focused attention
not only on the capital structures of U.S. firms, but on
the capital structures of foreign firms as well.
• In general, non-U.S. companies have much higher
degrees of indebtedness than their U.S. counterparts.
• In most European and Pacific Rim countries, large
commercial banks are more actively involved in the
financing of corporate activity than has been true in
the U.S.
Capital Structure of Non-U.S. Firms
• Furthermore, banks in these countries are permitted to
make large equity investments in non-financial
corporations -- a practice forbidden in the U.S.
• However, similarities also exist between U.S. firms
and their foreign counterparts.
• For example, the same industry patterns of capital
structure tend to be found around the world.
• In addition, the capital structures of U.S.-based MNCs
tend to be similar to those of foreign-based MNCs.
Capital Structure Theory
MM [ Modigliani and Miller(1958)]: capital structure irrelevancy
• According to finance theory, firms possess a target
capital structure that will minimize its cost of capital.
• Unfortunately, theory can not yet provide financial
mangers with a specific methodology to help them
determine what their firm’s optimal capital structure
might be.
• Theoretically, however, a firm’s optimal capital
structure will just balance the benefits of debt
financing against its costs.
Capital Structure Theory
• The major benefit of debt financing is the tax shield
provided by the federal government regarding interest
payments.
• The costs of debt financing result from
– the increased probability of bankruptcy caused by
debt obligations,
– the agency costs resulting from lenders monitoring
the firm’s actions, and
– the costs associated with the firm’s managers
having more information about the firm’s prospects
than do investors (asymmetric information).
Capital Structure Theory
Tax Benefits
NI  ( EBIT  Int )(1   )  EBIT  EBIT   Int  Int 
每年的 tax savings為Int 
• Allowing companies to deduct interest payments when
computing taxable income lowers the amount of corporate
taxes.
• This in turn increases firm cash flows and makes more cash
available to investors.
• In essence, the government is subsidizing the cost of debt
financing relative to equity financing.
Capital Structure Theory
Probability of Bankruptcy
• The probability that debt obligations will lead to
bankruptcy depends on the level of a company’s
business risk and financial risk.
• Business risk is the risk to the firm of being unable to
cover operating costs.
• In general, the higher the firm’s fixed costs relative to
variable costs, the greater the firm’s (1)
operating
leverage and business risk.
(2)
(3)
• Business risk is also affected by revenue and cost
stability.
Capital Structure Theory
Probability of Bankruptcy
• The firm’s capital structure - the mix between debt
versus equity - directly impacts financial leverage.
• Financial leverage measures the extent to which a firm
employs fixed cost financing sources such as debt and
preferred stock.
• The greater a firm’s financial leverage, the greater will
be its financial risk - the risk of being unable to meet
its fixed interest and preferred stock dividends.
Capital Structure Theory
Agency Costs Imposed by Lenders
• When a firm borrows funds by issuing debt, the
interest rate charged by lenders is based on the
lender’s assessment of the risk of the firm’s
investments.
• After obtaining the loan, the firm
(stockholders/managers) could use the funds to invest
in riskier assets.
• If these high risk investments pay off, the stockholders
benefit but the firm’s bondholders are locked in and
are unable to share in this success.
Capital Structure Theory
Agency Costs Imposed by Lenders
• To avoid this, lenders impose various monitoring costs
on the firm.
• Examples of these monitoring costs would include:
– raising the rate on future debt issues,
– denying future loan requests,
– imposing restrictive bond provisions.
Capital Structure Theory
Pecking order
• (1)Retained earnings
• (2)Debt
• (3)Equity
Note: Agency Costs Imposed by
Stockholders
• As firms issue more stock, the ownership becomes more
diffused and therefore separated from management.
• Manager has incentives to consume more perks and work
less.
• This will hurt the stockholders.
• To avoid this, stockholders impose various monitoring
costs on the firm.
• Examples of these monitoring costs would include:
– establishing a more efficient director board, e.g., outside
director
– pressure from the SEC and CPA to closely monitor the
management,
– asking for more cash dividends.
Capital Structure Theory
Asymmetric Information
• Asymmetric information results when managers of a
firm have more information about operations and
future prospects than do investors.
• Asymmetric information can impact the firm’s capital
structure as follows:
Suppose management has identified an extremely
lucrative investment opportunity and needs to raise
capital. Based on this opportunity, management believes
its stock is undervalued since the investors have no
information about the investment.
Capital Structure Theory
Asymmetric Information
• Asymmetric information results when managers of a
firm have more information about operations and
future prospects than do investors.
• Asymmetric information can impact the firm’s capital
structure as follows:
In this case, management will raise the funds using debt
since they believe/know the stock is undervalued
(underpriced) given this information. In this case, the
use of debt is viewed as a positive signal to investors
regarding the firm’s prospects.
Capital Structure Theory
Asymmetric Information
• Asymmetric information results when managers of a
firm have more information about operations and
future prospects than do investors.
• Asymmetric information can impact the firm’s capital
structure as follows:
On the other hand, if the outlook for the firm is poor,
management will issue equity instead since they
believe/know that the price of the firm’s stock is
overvalued (overpriced). Issuing equity is therefore
generally thought of as a “negative” signal.
The Optimal Capital Structure
So What is the Optimal Capital Structure?
• In general, it is believed that the market value of a
company is maximized when the cost of capital (the
firm’s discount rate) is minimized.
• The value of the firm can be defined algebraically as
follows:
V = EBIT (1 - t)
ka
假設zero growth model
ka為WACC
The Optimal Capital Structure
So What is the Optimal Capital Structure?
• 股東每年所享有之現金流量
 ( EBIT  Int )(1   )  Dep  C.E.  NWC  PR
PR=本期攤還之本金
Dep=折舊費用
C.E.=資本支出=今年的機器廠房等固定資產比去年增加的部份
NWC=淨營運資金之改變
• 假設不成長，則Dep=CE，且NWC=0
∴上式=EBIT(1-)-Int(1- )-PR
至於債權人每年所享有之現金流量=Int(1- )+PR，所以整個公司
每年的現金流量= EBIT(1-)
• It can be described graphically as shown on the following two
slides.
The Optimal Capital Structure
Kd比ke低是因為tax shield以及求償權
當D/A=0時，WACC=ke。隨著(D/A) 時kd所佔的比重也愈來愈大
，但因為kd<ke，所以wacc一開始會下降
Cost (%)
Graphically
Ke Cost of equity
WACC =ka
Ke
Why 先下降再上升?

D
D
 k d  (1  )  ke
A
A
Kd
為稅後的cost of debt
Kd
0
Target
Capital
Structure
TD/TA (%)
The Optimal Capital Structure
Firm
Value ($)
Graphically
V = EBIT (1 - t)
ka
V($)
0
Target
Capital
Structure
TD/TA (%)
The Optimal Capital Structure
• An example of how this might work using actual
numbers is demonstrated below:
Cost of Capital & Firm Value for Alternative Capital Structures
Source of
Capital
Capital
Structure 1
Capital
Structure 2
Capital
Structure 3
Debt
25%
40%
70%
Equity
75%
60%
30%
WACC
10%
8%
13%
Expected Future
Annual Cash Flows $
Firm Value
$
20 $
20 $
20
200 $
250 $
160
The Optimal Capital Structure
WACC & Firm Value
WACC (%)
Firm Value ($)
13%
$300
12%
$250
11%
$200
10%
$150
9%
$100
8%
7%
$50
6%
$25%
40%
70%
Total Debt/Total Assets
WACC
Value
Debt Ratios for Selected Industries
Debt Ratios for Selected Industries (1994-1995)
Debt
TIE
Manufacturing:
Ratio
Ratio
Books
65%
Computers
Steel
Debt
TIE
Retailing:
Ratio
Ratio
3.8
Autos
78%
2.9
58%
3.0
Restaurants
68%
2.9
59%
3.7
Shoes
60%
3.5
Wholesaling:
Services:
Furniture
66%
2.9
Accounting
52%
6.6
Groceries
68%
2.6
Advertising
77%
4.9
Hardw are
60%
3.1
Physicians
70%
2.7
EPS-EBIT Approach to Capital Structure
• The EPS-EBIT approach to capital structure involves
selecting the capital structure that maximizes EPS
over the expected range of EBIT.
• Using this approach, the emphasis is on maximizing
the owners returns (EPS).
• A major shortcoming of this approach is the fact that
earnings are only one of the determinants of
shareholder wealth maximization.
• This method does not explicitly consider the impact of
risk.
EPS-EBIT Approach to Capital Structure
Example
The capital structure of JGS, a soft drink manufacturer
is shown in the table below. Currently, JGS uses only
equity in its capital structure. Thus the current debt
ratio is 0.00%. Assume JGS is in the 40% tax bracket.
JGS Current Capital Structure
Long-term debt
$
-
Common stock (25,000 shares @ $20)
$
500,000
Total Capital (assets)
$
500,000
EPS-EBIT Approach to Capital Structure
EPS-EBIT coordinates for JSG’s current capital
structure can be found by assuming two EBIT values
and calculating the associated EPS as follows:
EBIT
$
100,000
Interest
$
EBT
$
100,000
$
200,000
T
$
40,000
$
80,000
NI
$
60,000
$
120,000
EPS
$
2.40
$
4.80
-
$
$
200,000
-
This can be plotted on an EPS-EBIT plane as
follows:
EPS-EBIT Approach to Capital Structure
JSG's Zero Leverage Financing Plan
$6.00
EPS ($)
$5.00
$4.80
$4.00
$3.00
$2.00
$2.40
$1.00
$$100,000
$200,000
EBIT ($)
EPS-EBIT Approach to Capital Structure
JSG is considering altering its capital structure while
maintaining its original $500,000 capital base as
shown in the table below:
JSG's Alternative Current and Alternative Capital Structures
Debt Ratio Total Assets
Debt
-
Equity
Int. Rate (%) Annual Int. ($) No. of Shares
0%
$ 500,000 $
$ 500,000
0.0%
$
-
25,000
30%
$ 500,000 $ 150,000 $ 350,000
10.0%
$
15,000
17,500
60%
$ 500,000 $ 300,000 $ 200,000
16.5%
$
49,500
10,000
We can use this information to calculate the EPSEBIT coordinates as shown on the following slide:
EPS-EBIT Approach to Capital Structure
Capital Structure
30% Debt Ratio
EBIT
$ 100,000
60% Debt Ratio
$ 200,000
$ 100,000
$ 200,000
Interest $
15,000
$
15,000
$
49,500
$
EBT
$
85,000
$ 185,000
$
50,500
$ 150,500
T
$
34,000
$
74,000
$
20,200
$
60,200
NI
$
51,000
$ 111,000
$
30,300
$
90,300
EPS
$
2.91
$
$
3.03
$
9.03
6.34
49,500
This may be shown graphically as shown on the
following slide:
EPS-EBIT Approach to Capital Structure
多少的EBIT會使得EPS=0?
EPS-EBIT Analysis
令EPS=0，所以(EBIT-Int)(1-)=0
∴EBIT=Int
EPS (0% Debt)
EPS (30% Debt)
EPS($)
$10.00
$8.00
EPS (60% Debt)
若目標為EPS maximization，則當EBIT在不同的區間時，公
司會prefer不同的debt ratio
$6.00
$4.00
$2.00
$0.00
($2.00)
$-
$100,000
$200,000
($4.00)
EPS極大化並不是個好目標，因為並未考慮risk!
如debt ratio 愈大，FBP就愈大，同時利息保障倍數(EBIT/INT)
就愈小，DFL(上圖之斜率)就愈大，所以Financial risk愈高
EBIT($)
Basic Shortcoming of EPS-EBIT Analysis
• Although EPS maximization is generally good for the
firm’s shareholders, the basic shortcoming of this
method is that it does not necessary maximize
shareholder wealth because it fails to consider risk.
• If shareholders did not require risk premiums
(additional return) as the firm increased its use of debt,
a strategy focusing on EPS maximization would work.
• Unfortunately, this is not the case.
Choosing the Optimal Capital Structure
• The following discussion will attempt to create a
framework for making capital budgeting decisions that
maximizes shareholder wealth -- i.e., considers both
risk and return.
• Perhaps the best way to demonstrate this is through
the following example:
Assume that JSG is attempting to choose the best of
several alternative capital structures -- specifically, debt
ratios of 0, 10, 20, 30, 40, 50, and 60 percent. Furthermore,
for each of these capital structures, the firm has estimated
EPS, the CV of EPS, and required return
Choosing the Optimal Capital Structure
If we assume that all earnings are paid out as dividends,
we can use the zero growth valuation model [P0 =
EPS/ks] to estimate share value as follows:
Estim ated Share Value Resulting from Alternative Capital Structures
for JSG Com pany
類似第10章RADR的方式
Debt
Expected
Estim ated
Estim ated
Estim ated
Ratio
EPS
CV of EPS
Requ. Return
Share Price
0%
$
2.40
0.71
11.5%
$
20.87
10%
$
2.55
0.74
11.7%
$
21.79
20%
$
2.72
0.78
12.1%
$
22.48
30%
$
2.91
0.83
12.5%
$
23.28
40%
$
3.12
0.91
14.0%
$
22.29
50%
$
3.18
1.07
16.5%
$
19.27
60%
$
3.03
1.40
19.0%
$
15.95
Choosing the Optimal Capital Structure
另一個方法為使用Hamada Formula
 equity
D
 1  (1   )  unlevered，再放入CAPM
E
1.先以OLS迴歸估出某公司股票之Beta值，並找出其D/E
2.利用上式估出βunlevered
3.再次利用上式找出在不同D/E時的βequity
4.代入CAPM求出ks
E(ri)=rf+ βi [E(rm)-rf
Choosing the Optimal Capital Structure
Estimated Stock Price at Various Capital Structures
Expected EPS
Estim ated Share Price
EPS ($)
Stock Price ($)
$3.40
$24.00
$3.20
$22.00
$20.00
$3.00
$18.00
$2.80
$16.00
$2.60
$14.00
$2.40
$12.00
$2.20
$10.00
0%
10%
20%
30%
40%
Debt Ratio (%)
50%
60%
70%
Other Influences on Capital Structure Choice
Flexibility
Maintaining financial flexibility simply means that a
company would like to give itself slack in terms of
being able to raise additional capital to support
working capital requirements if desirable investment
opportunities arise.
As a result, most firms try to ensure that they have
excess borrowing capacity available by keeping debt
levels at manageable levels.
Other Influences on Capital Structure Choice
Timing
The sale of securities by most firms depend not only
on the investment opportunities available but also on
the the cost of capital at a particular point in time.
利率高：發股票
利率低：舉債
Successful companies usually try to forecast and
take advantage of changing market conditions to
lower their overall cost of raising funds.
Other Influences on Capital Structure Choice
Corporate Control
Many firms avoid the issuance of new equity
because it may cause existing controlling
shareholders to lose their ability to influence the
direction of the company.
As a result, most companies are reluctant to issue
new shares of stock and instead issue debt when
additional funds are needed.
Other Influences on Capital Structure Choice
Maturity Matching
Many firms also try to match the maturity of their
source of financing with the maturity of the assets
they are using the funds to finance. As a result, the
capital structure of a firm is determined in part by the
types of investments it makes.
Other Influences on Capital Structure Choice
Management’s Attitude
Toward Risk
這些factors都會影響management決定要舉多少債?
Management’s perception about the risk of using
debt versus equity to finance assets will also
determine the nature of a company’s capital
structure.
External risk assessment:債權人及信用評等機構對公司的信用風險評估
Contractual obligation: 如債權保護條款
Business risk