- An Introduction to Capital Structure
- Basic Differences in Capital Structure of Two Firms
- Value of a Firm (Using Operating Free Cash Flows)
- Does Capital Structure Matter?
- Agency Costs of Equity and Debt
- Why Issue of Additional Equity Leads to Share Price Fall?
- What CFOs Consider While Making Capital Structure Decisions?
What CFOs Consider While Making Capital Structure Decisions?
In 2001, John Graham and Campbell Harvey conducted a survey of that analyzed the current practice of corporate finance, with particular focus on the areas of capital budgeting and capital structure. In simple terms, they asked American Chief Financial Officers what factors they consider while making capital structure decisions.
As per this survey, the key considerations the firms have while issuing debt are:
Tax benefits: The extent of tax benefit from the debt. If the firms have other tax shields (such as depreciation, expenditure on research and development, etc.), they will generally issue less debt.
Distress cost: Firms with high volatility in their earnings will have less debt. Small firms will have less debt. Large firms will have high debt.
Apart from this flexibility and credit ratings were cited as very important considerations in corporate debt policy. By maintaining flexibility, most companies mean preserving unused debt capacity. It’s also interesting to note that although many companies say their excess debt capacity is intended mainly to finance possible future expansions and acquisitions, such firms also seem intent on retaining much of that unused debt capacity even after expanding.
And, as suggested earlier, such flexibility tends to be associated with maintaining a target credit rating. The paper can be downloaded from the fellow link:
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