corprate debt policy

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Welcome to The PresentationCorporate Debt Policy


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Debt Financing

Debt is borrowing money from an outside source with thepromise to return the principal, in addition to an agreed-

upon level of interest.

In finance, debt is also referred to as leverage.

The most popular source for debt financing is the bank,but debt can also be issued by a private company or even

a friend or family member.

IBAIS University - MBA4428

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Pros & Cons

Maintain ownership

Tax deductions

Lower interest rate

Repayment obligation

High rates

Impacts credit rating

Cash and collateral


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Alternatives to Debt

Financing

Equity financing:This involves selling shares of your

company to interested investors, or putting your own

money into the company.


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Debt Vs. Equity : Which

is best?

Most businesses choose for a blend of both equity and

debt financing to meet their needs when expanding a

business.

The two forms of financing together can work well to

reduce the downsides of each.


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MM Theorem on Corporate

Capital Structure

The study of a companys optimal capital structure dates

back to 1958 when Franco Modigliani and Merton Millerpublished their Nobel Prize winning work The Cost of

Capital, Corporation Finance, and the Theory of

Investment.

under conditions where corporate income taxes and

distress costs are not present in the business environment,

the use of financial leverage has no effect on the value of

the company.


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Continue.

Modigliani and Miller expanded their IrrelevanceProposition theorem to include the impact of corporate

income taxes, and the potential impact of distress cost, forpurposes of determining the optimal capital structure for acompany.

Their revised work, universally known as the Trade-offTheory of capital structure, makes the case that acompanys optimal capital structure should be the prudent

balance between the tax benefits that are associated withthe use of debt capital, and the costs associated with the

potential for bankruptcy for the company.


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Assumption 01

ROE of a Company with 100% financing with equity


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Assumptions Result

financial leverage can be used to make the performance of acompany look dramatically better than what can be achieved

by solely relying on the use of equity capital financing.


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Real ase Study

Company Name Debt Equity

Ratio 2013

(Times)

Debt Equity

Ratio 2012

(Times)

ROE 2013

(%)

ROE 2012

(%)

British American Tobacco

Bangladesh Company Ltd.

0 (Zero) 0 (Zero) 54.69 56.05

BSRM Steels Ltd. 2.14 2.81 18.64 15.62

Square Textiles Limited 0.40 0.48 12.51 13.71


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Bottom Line

Corporate management utilizes financial leverage (Funding

with Debt) primarily to increase the companys earnings per

share and to increase its return-on-equity.

With these advantages come increased earnings variability and

the potential for an increase in the cost of financial distress,

perhaps even bankruptcy.

The management of a company should take into account the

business risk of the company, the companys tax position, thefinancial flexibility of the companys capital structure.

The right ratio will vary according to type of business, cash

flow, profits and the amount of money you need to expand

your business.


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corprate debt policy

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