Chapter 12 Assignment 2. Introduction to capital structure theory In his private office, just down the hall from his conference room, the Chief Financial Officer (CFO) of Turner Newspaper Group (TNG) is meeting with his newly hired assistant, lan. CFO Madison CFO Madison Before our next meeting with the bankers, let's take a second and make sure that we have a common understanding about the company's capital structure. TNG can potentially have three different capital structures: its current, actual capital structure, a target capital structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in time, we'd be talking about which capital structure, Madison? We'd be talking about TNG'S capital structure. This is the capital structure that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34,5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optimal capital structure? An optimal capital structure is characterized by two important attributes: First, minimizes the firm's and second, it maximizes which should make our shareholders very happy. Again, that's great! Now, tell me, in general and without talking about TNG in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure? Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant. Second, the availability of may prompt a company to borrow or issue new shares and thereby deviate from its target capital CFO Madison Madison CFO Madison have three different capital structures: its current, actual capital structure, a target capital structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in time, we'd be talking about which capital structure, Madison? We'd be talking about TNG'S capital structure. This is the capital structure that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optimal capital structure? An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's and second, it maximizes which should make our shareholders very happy. Again, that's great! Now, tell me, in general and without talking about TNG in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure? Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant Second, the availability of may prompt a company to borrow or issue new shares and thereby deviate from its target capital CFO Madison structure. CFO Madison, you've passed my first test with flying colors! With this understanding of the theory and some real-world experience, you'll be earning your bonus in no time. 2. Introduction to capital structure theory In his private office, just down the hall from his conference room, the Chief Financial Officer (CF his newly hired assistant, Ian. CFO Madison Before our next meeting with the bankers, let's take a second and make sure that have a common understanding about the company's capital structure. TNG can pol have three different capital structures: its current, actual capital structure, a target structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in we'd be talking about which capital structure, Madison? We'd be talking about TNG'S capital structure. This is the capital struct that TNG is currently exhibiti can differ from its ideal capital structure. optimal Very good. Now, if TNG's cur I structure consists of 34.5% debt and 65.5% common equity, then, Madiso actual puld we know if we are operating with our opti capital structure? target An optimal capital structure rized by two important attributes: First, it minimizes the firm's , and second, it maxim , which should make our shareholders very happy. CFO Madison CFO Madison Again, that's great! Now, tell me, in general and without talking about TNG in particula why would a company ever be willing to operate with a capital structure that is not equ to its desired or target capital structure? Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities its industry becomes risky or competitive, and, in general, these changes wil allow a firm to increase its reliance on debt financing, everything else remaining constan ttempts: Keep the Highest: /1 2. Introduction to capital structure theory In his private office, just down the hall from his conference room, the Chief Financial Officer (CFO) of T this newly hired assistant, Ian. CFO Before our next meeting with the bankers, let's take a second and make sure that we have a common understanding about the company's capital structure. TNG can potentially have three different capital structures: its current, actual capital structure, a target capita structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in time, we'd be talking about which capital structure, Madison? We'd be talking about TNG's capital structure. This is the capital structure that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optimal capital structure? Madison CFO Madison An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's and second, it maximizes which should make our shareholders very na weighted average cost of capital CFO Again, that's great! shareholder wealth talking about TNG in particular, why would a company ever be willing to operate with capital structure that is not equal to its desired or target capital structure? Madison Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant. 2. Introduction to capital structure theory In his private office, just down the hall from his conference room, the Chief Financial Officer (CF his newly hired assistant, Ian. CFO Before our next meeting with the bankers, let's take a second and make sure that have a common understanding about the company's capital structure. TNG can pot have three different capital structures: its current, actual capital structure, a target structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in t we'd be talking about which capital structure, Madison? We'd be talking about TNG's capital structure. This is the capital struct that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optim capital structure? Madison CFO Madison An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's , and second, it maximiz which should make our CFO Madison the firm's weighted average cost of capital nd without talking about TNG in particular the value of the firm te with a capital structure that is not equa TOTES Streo or arger capica structure Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant BO ODO have a common understanding about the company's capital structure. TNG ca have three different capital structures: its current, actual capital structure, a ta structure, and an optimal capital structure. If we wanted to talk about the obse capital structure at which TNG actually exhibits today or any other specific poin we'd be talking about which capital structure, Madison? We'd be talking about TNG's capital structure. This is the capitals that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 6: common equity, then, Madison, how would we know if we are operating with our capital structure? Madison CFO Madison 1 CFO An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's and second, it ma , which should make our shareholders very happy. Again, that's great! Now, tell me, in general and without talking about TNG in part why would a company ever be willing to operate with a capital structure that is not to its desired or target capital structure? Well, sir, there are several reasons that I can think of. Let's see. First, a firm may debt and equity financing that differs from its targeted amounts if its business activ its industry becomes risky or competitive, and, in general, these change allow a firm to increa iance on debt financing, everything else remaining con Second, the availabili more may pr a company to borrow less new shares and thereby deviate from its target capital structure. Madison CFO Madison, you've passed my first test with flying colors! With this understanding of the theory and some real-world experience, you'll be earning your bonus in no time. have three different capital structures: its current, actual capital structure, a target capi structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in time, we'd be talking about which capital structure, Madison? We'd be talking about TNG'S capital structure. This is the capital structure that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optimal capital structure? Madison CFO Madison An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's and second, it maximizes which should make our shareholders very happy. Again, that's great! Now, tell me, in general and without talking about TNG in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure? CFO Madison Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance financing, everything else remaining constant. less Second, the availability of may prompt a company to borrow or issue new more nd thereby deviate from its target capital structure. CFO Madison, you've passed my first test with flying colors! With this understanding of the theory and some real-world experience, you'll be earning your bonus in no time. Grade it CFO Before our next meeting with the bankers, let's take a second and make sure that we have a common understanding about the company's capital structure. TNG can potentially have three different capital structures: its current, actual capital structure, a target capital structure, and an optimal capital structure. If we wanted to talk about the observed capital structure at which TNG actually exhibits today or any other specific point in time, we'd be talking about which capital structure, Madison? We'd be talking about TNG's capital structure. This is the capital structure that TNG is currently exhibiting, and it can differ from its ideal capital structure. Very good. Now, if TNG's current capital structure consists of 34.5% debt and 65.5% common equity, then, Madison, how would we know if we are operating with our optimal capital structure? Madison CFO Madison CFO An optimal capital structure is characterized by two important attributes: First, it minimizes the firm's and second, it maximizes which should make our shareholders very happy. Again, that's great! Now, tell me, in general and without talking about TNG in particular, why would a company ever be willing to operate with a capital structure that is not equal to its desired or target capital structure? Well, sir, there are several reasons that I can think of. Let's see. First, a firm may use debt and equity financing that differs from its targeted amounts if its business activities or its industry becomes risky or competitive, and, in general, these changes will allow a firm to increase its reliance on debt financing, everything else remaining constant. Second, the availability of may prompt a company to borrow or is Ts target capital structure unusually expensive sources of capital Madison CFO Madison, you've passed munusually inexpensive sources of capital erstanding of the theory and some real-world experience you moe earring your bonus in no time. Grade It Now MacBook 80 F3 000 F4 F5