Capital structure and payout policy
12 Raising long-term financing
13 Capital structure
14 Long-term debt and leasing
15 Payout policy
The previous chapters provided a framework
for deciding how an organisation or business
should invest its money. In this Part, we examine
the related questions: How should managers
finance the investments they undertake?
Should managers pay for new investments by
using cash that the firm generates internally, or
should external sources of funds be tapped? Is it
better to finance with equity or with debt? If the
organisation’s investments are successful, should
the company return capital to shareholders
by paying a dividend, or should it repurchase
shares instead?
Chapter 12 describes the trade-offs firmsface when they choose between internal
or external financing or between debt and
equity. The chapter explains how organisations
work with investment bankers to issue equity.
Because investment bankers serve two
masters – firms that want to sell securities
and investors who must be persuaded to buy
them – the investment banking business is
fraught with potential conflicts of interest.
Chapter 12 describes some of the conflicts that
arise in this industry.
In Chapter 13, we explore the question of
whether managers can increase the value of an
organisation by financing its operations with
an optimal mix of debt and equity. A classic
and important line of argument suggests that
such an optimal capital structure may not exist,
but the chapter offers useful guidelines that
managers can consult when deciding what type
of funding to raise for their companies.
Chapter 14 looks at long-term debt and
leasing. It may seem odd to put debt and leasing
together, but a lease is a fixed obligation, just
like the obligation organisations undertake
when they borrow money by issuing bonds.
Managers evaluate lease financing in a fashion
similar to that used when deciding how much
long-term debt to issue.
Chapter 15 examines how managers can
affect the value of an organisation through
its dividend payout policy. In Chapter 5, we
presented a model that showed that the value of
any stock can be viewed as the present value
of all dividends that the stock will pay through
time. We explore the ways that dividends may,
or may not, affect organisation value.431