优化资本结构债务与权益之间找到恰当的平衡外文翻译.docx

优化资本结构债务与权益之间找到恰当的平衡外文翻译.docx

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优化资本结构债务与权益之间找到恰当的平衡外文翻译

本科毕业论文（设计）

外文翻译

Optimizingthecapitalstructure:

Findingtherightbalancebetweendebtandequity

Justover50yearsagoMillerandModigliani（1958）showedthatunderacertainsetofconditions—namelyperfectcapitalmarketswithnotaxesandagencyconflicts—afirm’scapitalstructureisirrelevanttoitsvaluation.

Theirresultsarecontroversialandhaveraisedalargenumberofquestionsfromacademicsandpractitioners.

Thisarticlesummarizesthemainissuesunderlyingthechoicebyfirmsofanappropriatecapitalstructure,takingintoaccounttheirspecificfundamentalsaswellasmacroeconomicfactors.

Itpresentsthebenefitsandcostsofborrowing,describeshowtoassessthesetoarriveatthebasictrade-offbetweendebtandequity,andexaminesconditionsunderwhichdebtbecomesirrelevant.

TypesofFinancing

Therearethreefinancingmethodsthatcompaniescanuse:

debt,equity,andhybridsecurities.Thiscategorizationisbasedonthemaincharacteristicsofthesecurities.

DebtFinancing

Debtfinancingrangesfromsimplebankdebttocommercialpaperandcorporatebonds.Itisacontractualarrangementbetweenacompanyandaninvestor,wherebythecompanypaysapredeterminedclaim（orinterest）thatisnotafunctionofitsoperatingperformance,butwhichistreatedinaccountingstandardsasanexpensefortaxpurposesandisthereforetax-deductible.Thedebthasafixedlifeandhasapriorityclaimoncashflowsinbothoperatingperiodsandbankruptcy.Thisisbecauseinterestispaidbeforetheclaimstoequityholders,and,ifthecompanydefaultsoninterestpayments,itwillbedeclaredbankrupt,itsassetswillbesold,andtheamountowedtodebtholderswillbepaidbeforeanypaymentsaremadetoequityholders.

EquityFinancing

Equityfinancingincludesowners’equity,venturecapital（equitycapitalprovidedtoaprivatefirminexchangeforashareownershipofthefirm）,commonequity,andwarrants（therighttobuyashareofstockinacompanyatafixedpriceduringthelifeofthewarrant）.Unlikedebt,itispermanentinthecompany,itsclaimisresidualanddoesnotcreateataxadvantagefromitspaymentsasdividendsarepaidafterinterestandtax,itdoesnothavepriorityinbankruptcy,anditprovidesmanagementcontrolfortheowner.

HybridSecurities

Hybridsecuritiesaresecuritiesthatsharesomecharacteristicswithbothdebtandequityandinclude,forexample,convertiblesecurities（definedasdebtthatcanbeconvertedintoequityataprespecifieddateandconversionrate）,preferredstock,andoption-linkedbonds.

TheIrrelevanceProposition

In1958ModiglianiandMillerdemonstratedthat,underacertainsetofassumptions,thechoicebetweenanyofthesesecurities（referredtoascapitalstructureorleverage）isnotrelevanttoacompany’svaluation.Theassumptionsinclude:

notaxes,nocostsoffinancialdistress,perfectcapitalmarkets,nointerestratedifferentials,noagencycosts（rationality）,andnotransactioncosts.Theseassumptionsare,infact,themaindriversofcapitalstructureandgaverisetothetrade-offtheoryofleverage.

TheTrade-OffofDebt

Inthisso-calledMiller–Modiglianiframework,firmschoosetheiroptimallevelofleveragebyweighingthefollowingbenefitsandcostsofdebtfinancing.

BenefitsofDebt

Therearetwomainadvantagesofdebtfinancing:

taxation,andaddeddiscipline.

Taxation:

Sincetheinterestondebtispaidbeforetaxation,whereasdividendspaidtoequityholdersareusuallypaidfromprofitaftertax,thecostofdebtissubstantiallylessthanthecostofequity.Thistax-deductibilityofinterestmakesdebtfinancingattractive.Supposethatthedebtofacompanyis$100millionandtheinterestrateis10%.Everyyearthecompanypaysinterestof$10million.Supposethatthecorporationtaxrateis30%.Ifthecompanydoesnotpaytax,itsinterestwillbe$10millionandthecostofdebtwillbe10%.However,ifthecompanyisabletodeductthetaxonthis$10millionfromitscorporationtaxpayment,thenthecompanysaves$10million×30%=$3millionintaxpaymentsperyear,makingtheeffectiveinterestpaymentonly$7million.Ifthedebtispermanent,everyyearthecompanywillhavea$3milliontaxsaving,referredtoasataxshield.Wecancomputethepresentvalue（PV）bydiscountingannualvaluebythecostofdebt,asfollows:

PVoftaxshield=kd×D×tckd=D×tc

wherekdisthecostofdebt,Distheamountofdebt,andtheproductofkdandDgivestheamountoftheinterestcharge.tcisthecorporationtaxrate.Wesimplifytheratiobykdtoobtainthepresentvalueofthetaxshieldastheproductoftheamountofdebtandthecorporationtaxrate.Thus,thevalueofacompanythatisfinancedwithdebtandequity（suchacompanyisreferredto“levered”）shouldbeequaltoitsvalueifitisfinancedonlywithequityplusthepresentvalueofthetaxshield.Wecanwritethisvalueas:

ValueofleveredfirmwithdebtD=Valueofnonleveredfirm+D×tc

Theseargumentssuggestthattheafter-taxcostofdebtcanbecomputedas10%×（1-30%）=7%.

Addeddiscipline:

Inpractice,themanagersarenottheownersofthecompany.Thisso-calledseparationofmanagersandstockholdersraisesthepossibilitythatmanagersmayprefertomaximizetheirownwealthratherthatofthestockholders.Thisisreferredtoastheagencyconflict.Ingeneral,debtmaymakemanagersmoredisciplinedbecausedebtrequiresafixedpaymentofinterest,anddefaultingonsuchpaymentswillleadacompanytobankruptcy.

CostsofDebt

Debthasanumberofdisadvantages,includingahigherprobabilityofbankruptcy,anincreaseintheagencyconflictsbetweenmanagersandbondholders,lossoffuturefinancialflexibility,andthecostofinformationasymmetry.

Expectedbankruptcycost.Giventhatdebtholderscandeclareacompanybankruptifitdefaultsonitsinterestpayment,companiesthathaveahighlevelofdebtarelikelytohaveahighprobabilityoffacingsuchadefault.Thisprobabilityisalsoincreasedwhenacompanyisoperatinginahighbusinessriskenvironment.Debtfinancingcreatesfinancialrisk.Thus,companiesthathavehighbusinessriskshouldnotincreasetheirriskofdefaultbytakingonahighfinancialriskthroughtheiruseofdebt.Evidenceindicatesthatmuchofthelossofvalueoccursnotintheliquidationprocessbutinthestageoffinancialdistress,whenthefirmisstrugglingtopayitsbills（includinginterest）,eventhoughitmaynotgoontobeliquidated.

Agencycosts.Thesecostsarisewhenacompanyborrowsfundsandthemanagersusethefundstofinancealternative,usuallymorerisky,activitiesthanthosespecifiedintheborrowingcontracttogeneratehigherreturnstostockholders.Thegreatertheseparationbetweenmanagersandlenders,thehighertheagencycosts.

Lossoffuturefinancingflexibility.Whenafirmincreasesitsdebtsubstantially,itfacesdifficultiesraisingadditionaldebt.Companiesthatcanforecasttheirfuturefinancingneedsaccuratelycanplantheirfinancingbetterandmaynotraiseadditionalfundsrandomly.Ingeneral,thegreatertheuncertaintyaboutfuturefinancingneeds,thehigherthecosts.

Informationasymmetry.Whencompaniesdonotdiscloseinformationtothemarket,theirinformationasymmetrywillbehigh,resultinginahighercostofdebtfinancing.

Redeployableassetsofdebt.Lendersrequiresomesortofsecuritywhentheyfundacompany.Thissecurityisreferredtoascollateral.Lendersacceptassetsthatcanberesoldorredeployedintootheractivities,suchasproperty（realestate）,ascollateral.Ingeneral,thelowerthevalueoftheredeployableassetsofdebt,thehigherarethecosts.

FinancingChoicesandaFirm’sLifeCycle

Althoughcompaniesmayprefertouseinternalfinancingtominimizetheissuance（transaction）costs,thetrendinfinancingdependscriticallyonthefirm’slifecycle.

Start-upsaresmall,privatelyownedcompanies.Theyarelikelytobefinancedbyowners’fundsandbankborrowings.Theirfundingneedsarehigh,buttheirabilitytoraiseexternalfundingislimitedbecausetheydonothavesufficientassetstoofferassecuritytofinanceproviders.Theywilltrytoseekprivateequityfunding.Theirlong-termleverageislikelytobelowastheyaremainlyfinancedwithshort-termdebt.

Expandingcompaniesarethosethathavesucceededinattractingcustomersandestablishingapresenceinthemarket.Theyarelikelytobefinancedbyprivateequityand/orventurecapitalinadditiontoowners’equityandbankdebt.Theirlevelofdebtislowandtheyhavemoreshort-termthanlong-termdebtintheircapitalstructure.

High-growthcompaniesarelikelytobepubliclytraded,withrapidlygrowingrevenues.Theywillissueequityintheformofcommonstock,warrants,andotherequityoptions,andprobablyconvertibledebt.Theyarelikelytohaveamoderateleverage.

Maturecompaniesarelikelytofinancetheiractivitiesbyinternalfinancing,debt,andequity.Theirleverageislikelytoberelativelyhighbutwilldependonthecostsandbenefitsofdebtandtheirfundamentalfactors,suchasbusinessriskandtaxation.

Conclusion

Thisarticlediscussedthedifferentfinancingmethodscompaniescanuseandthenarguedthattheirchoicedependsonthecostsandbenefitsofdebtfinancingandthefirm’slifecycle.Forexample,whereasstartupcompaniesarelikelytobefinancedwithprivatepersonalfunds,makingtheirleveragelow,maturecompaniestendtohavehighleveragebecausetheyareabletomitigatethecostsofdebtandgainfromthetaxbenefits.Inadditiontothesefactors,inpracticefirmsmaychoosetheirfinancingmixbymimickingcomparablefirms,ort