affected by it, because it means that equity capital has a higher cost of capital than debt. When weighing capital structure decisions, cost of debt is one of the considerations that senior management needs to take into account, because a higher cost of capital essentially demands that the company earn higher returns. This makes sense for a company on a positive growth trajectory, but has its own challenges should the company no longer be growing.
If the company chooses debt, however, it must make the repayments on schedule, and that includes the interest payments. Debt may have a lower cost to it than equity, but it creates more of… Continue Reading...
Theories on How Companies Deal With Debt and Financial Distress
Companies can use two popular theories to conceptualize their capital structure. Pecking Order (POT) and Trade-Off (TOT) are always used interchangeably when proving organizations are seeking to ease their way of making capital structure decisions. The following study elucidates the differences between the two theories.
The Pecking Order vs. Trade-Off
The Trade-Off Theory refers to the concept that a company chooses how much equity finance and how much debt finance to use through balancing the benefits and costs (Agarwal, 2013). This theory explains that organizations are often financed partly with equity and partly with debt. Pecking Order Theory argues… Continue Reading...
areas that the finance team must consider are optimal capital structure, foreign exchange exposure, and controls. Much of the following explanation of the finance function will focus on these key subject areas.
Risk Management
Risk management in finance encompasses a lot of different things. The most basic concept is that most risk from a corporation’s perspective is financial. Risk reflects what might happen to the company’s valuation. Valuation is subject to a lot of unknowns, and these unknowns carry with them a downside. Risk management seeks to balance the need to grow, with the need to minimize downside risk.… Continue Reading...
