A Theoretical Model for Dividend Policy

2012 ◽  
Vol 02 (11) ◽  
pp. 74-85
Author(s):  
Jun Jiang
Keyword(s):  
Capital Structure ◽  
Decision Model ◽  
Turnover Rate ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Payout Policy ◽  
Equity Capital ◽  
Sustainable Growth ◽  
Optimal Decisions ◽  
Sustainable Growth Rate

Interactive determinations, featured in the corporation’s investing, financing and operating activities, explicitly lead firm’s decision ambiguity of payout policy as the result of benefit pursuit and competing among investors, agencies, and firm’s decision making. The study initiates and develops theoretical decision model through consolidating the segmented optimal decisions of, shareholders, agencies, and firms, recognizing the capital structure, tax effects, cash flows allocation effects, and executives’ utility optimality. It results the constructive implications for the implementation of payout policy, which consist of, equity capital turnover rate, taxes, cost of capital, and sustainable growth rate, and so on.

Are Banks Special?

2018 ◽  
Vol 08 (04) ◽  
pp. 1840004 ◽  
Author(s):  
Michel Crouhy ◽  
Dan Galai
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Equity Capital ◽  
Cost Of Equity Capital ◽  
Cost Of Equity ◽  
Market Conditions ◽  
The Cost ◽  
The Capital Structure

This paper addresses the following question: Are banks special firms that can achieve their goals only with high leverage, above and beyond what is considered acceptable for industrial corporations? This question is related to the issue of the cost of capital and how it is affected by leverage. If we accept the Modigliani–Miller (M&M) theorem (1958), then the capital structure is irrelevant for both the cost of capital and the value of the bank. Specifically, the M&M hypothesis argues that higher levels of equity capital reduce bank leverage and risk, leading to an offsetting decline in banks’ cost of equity capital. Hence, we ask the question whether banks are special firms such that M&M theorem does not apply to banks. We show that M&M propositions cannot be applied for banks primarily because of explicit guarantees and subsidies that provide incentives for increasing leverage. Then, some of the risk faced by the bank is transferred at no cost to the providers of these guarantees and subsidies, giving banks the incentive to increase leverage as much as they can. We show that under perfect market conditions, when risk is fairly priced, this opportunity vanishes.

The motivational heterogeneity of an all-equity capital structure

2018 ◽  
Vol 17 (2) ◽  
pp. 215-237
Author(s):  
David Caban
Keyword(s):  
Capital Structure ◽  
Agency Costs ◽  
Propensity Scores ◽  
Randomized Study ◽  
Cash Flows ◽  
Equity Capital ◽  
Content Type ◽  
Significant Difference ◽  
Low Levels ◽  
Free Cash Flows

Purpose This paper aims to investigate whether all-equity firms are a heterogeneous group as it relates to agency costs when compared to a matched sample of levered firms and to contribute toward the understanding of the “low leverage” puzzle and the motivations behind such a perplexing phenomenon. Design/methodology/approach Propensity score matching (PSM) is used to control for endogeneity issues common to this line of research. Because all-equity firms are self-selecting, it is not possible to conduct a true randomized study. PSM attempts to simulate a randomized study by selecting matching observations with similar propensity scores as the all-equity observations. Findings Agency costs are not the only explanation leading to the implementation of an all-equity capital structure. The motivation of such structure is strongly influenced by free cash flows (FCF) and growth opportunities (GO), whereby firms that have high levels FCF combined with low GO exhibit higher levels of agency costs versus their levered peers, while those that have low levels of FCF and high GO exhibit no significant difference in agency costs. Practical implications A better understanding of why a firm chooses such an extreme capital structure can help investors, auditors and potential future creditors in their decision-making process. Originality/value Most prior research treats capital structure as an exogenous variable. By applying PSM, not previously used in prior research, a new methodology is used to address the endogeneity issue related to observational studies such as this one. This paper contributes toward further understanding the perplexing “low-leverage” puzzle often discussed in the financial and accounting literature.

Impact of the cost of capital on the financing decisions of Brazilian companies

2015 ◽  
Vol 11 (3) ◽  
pp. 285-307 ◽  
Author(s):  
Tatiana Albanez
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Market Timing ◽  
Shareholder Wealth ◽  
Equity Capital ◽  
Cost Of Equity ◽  
Pecking Order ◽  
Content Type ◽  
Financing Decisions ◽  
The Cost

Purpose – The purpose of this paper is to examine the market timing behavior of listed Brazilian companies to verify the effects of the cost of capital on their financing decisions, and hence on their capital structure. Design/methodology/approach – The relation between the cost of capital (debt and equity capital) and the leverage of firms in the period from 2000 to 2011 is analyzed by means of regression models with panel data. For this purpose, different proxies are used for the cost of equity and debt capital. Findings – The results provide strong evidence that Brazilian firms take advantage of windows of opportunity to obtain financing, and that when the cost of equity capital is high, firms appear to follow a pecking order, giving preference to debt financing. However, the decision is based on the cost of alternative sources of funding rather than just on the hierarchy established by the pecking order theory, due to the information asymmetry between market agents. Originality/value – Few studies of the Brazilian capital market have analyzed firms’ capital structure under the market timing approach, and none have addressed the same aspects analyzed here. Therefore, this paper will be useful to different users of accounting information by indicating the factors that influence the capital structure of Brazilian firms, allowing a better analysis of whether these firms act to maximize the generation of shareholder wealth.

scholarly journals THE INFLUENCE OF THE CAPITAL STRUCTURE ON THE VALUE OF THE BUSINESS

2020 ◽  
Vol 8 (10) ◽  
pp. 265-268
Author(s):  
A. V. Strokova
Keyword(s):  
Capital Structure ◽  
Average Cost ◽  
Financial Stability ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Equity Capital ◽  
Minimum Condition ◽  
Net Profit ◽  
The Capital Structure

This article is devoted to the analysis of influence the capital structure on the value of a business using the example of PJSC "Rosneft". The article analyzes the capital structure of PJSC "Rosneft" and determines the most optimal one based on generalizing the relevant criteria - minimizing the weighted average cost of capital, maximizing net profit per 1 ruble. equity capital and compliance with the minimum condition for financial stability.

scholarly journals Role of debt-to-equity ratio in project investment valuation, assessing risk and return in capital markets

2021 ◽  
Vol 7 (1) ◽  
Author(s):  
Vasishta Bhargava Nukala ◽  
S. S. Prasada Rao
Keyword(s):  
Stock Price ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Equity Capital ◽  
Present Value ◽  
Gross Margin ◽  
Potential Growth ◽  
Equity Risk ◽  
Equity Ratio

AbstractIn this paper, a case study was performed with an aim to analyze the asset returns for two different companies and the risk and returns from capital projects using standard capital asset pricing method. To demonstrate how the present values of future cash flows are influenced by discount rates when the debt-to-equity capital structure ratio is varied between 0 and 2.5 debt-to-equity. The breakeven sensitivity was also conducted in relation to different gross margin ratios of company. It was found that high value of debt-to-equity ratio yielded a flatter net present value with increase in gross margins. Capital appraisal techniques were applied to illustrate the project returns and annual cash flows and its relationship with change in cost of capital. Analysis showed that when average cost of capital is increased beyond threshold value, the net present value from the firm’s project investments reduced significantly. A covariance analysis was performed to determine individual returns from two stocks traded in BSE Sensex and S&P 500 indices using the beta values. Comparing the individual and total returns of two stocks revealed that returns not only increased with increasing beta values–but also varied with earnings potential, growth rate of firm, dividend payout ratios and trading stock price. The standard deviation on portfolio of two stocks has been computed for varying asset weight ratios. It has been found that positive correlation between two stocks increased equity risk when weight ratios are not balanced in portfolio, while a negative correlation reduced equity risk.

Corporate Risk Management, Firms’ Characteristics and Capital Structure: Evidence from Bombay Stock Exchange (BSE) Sensex Companies

2018 ◽  
Vol 22 (4) ◽  
pp. 395-404
Author(s):  
Himanshu Joshi
Keyword(s):  
Risk Management ◽  
Capital Structure ◽  
Management Practices ◽  
Stock Exchange ◽  
Cash Flows ◽  
Equity Capital ◽  
Management Programme ◽  
Total Risk ◽  
Risk Management Programme ◽  
The Relationship

The current article takes account of the existing status of risk management practices of the Indian publicly listed companies and establishes the relationship of their risk management programme with the firms’ financial characteristics such as capital structure, assets’ size, asset tangibility, profitability and valuation multiples. To establish the relationship, a risk management score is constructed using publicly disclosed information for Bombay Stock Exchange (BSE) Sensex 30 companies. Results suggest that companies with more comprehensive risk management programmes are likely to enjoy lower costs of debt and have a higher propensity to invest in intangible assets. These firms with more comprehensive risk management programmes also demonstrate more stable cash flows, sales and net operating profit. It is also evident that firms that are deeply indulged in risk management activities are likely to have higher financial leverage as higher leverage increases a firm’s total risk, and their risk management activities act to balance that risk. Consequently, firms with extensive risk management activities can endure higher debt in their capital structure; hence, a risk management programme works as a substitute of equity capital.

EFFICIENT USE OF FINANCIAL RESOURCES OF THE ENTERPRISE

2020 ◽  
Vol 4 (10) ◽  
pp. 37-42
Author(s):  
O. S. LOSEVА ◽  
◽  
S. M. MOLCHANOVA ◽  
Keyword(s):  
Capital Structure ◽  
Cash Flows ◽  
Economic Benefits ◽  
Sustainable Growth ◽  
Financial Resources ◽  
Financial Flows ◽  
Financial Condition ◽  
Composition Structure ◽  
Effective Use ◽  
Market Relations

The article discloses the issues of analyzing the financial resources of an enterprise, the use of which is aimed at increasing future economic benefits and meeting the needs of an enterprise of a financial nature, ensuring the projected rates of sustainable growth and competitiveness of companies. It is noted that the above definitions of the essence of "financial resources" in the educational literature do not fully characterize their economic content, and the process of formation of financial resources, composition, structure, volume is determined by the size of production and the financial condition of the enterprise. The methods of formation of financial resources, elements of the liquidity and solvency management system, including, in addition to the formation of the flexibility of the capital structure, the procedure for planning cash flows, managing ac-counts receivable and the efficiency of using funds, are considered. The authors show the optimal capital structure that provides the necessary balance between the amount of equity and borrowed capital. It has been substantiated that the effective use of sources of financing for modern enterprises is necessary for the effec-tiveness of the management of financial flows of modern companies and the sustainable financial position of an enterprise in the conditions of market relations.

scholarly journals Evaluation of Capital Cost: Long Run Evidence from Manufacturing Sector

2020 ◽  
Vol 31 (2) ◽  
pp. 169-177
Author(s):  
Mantas Markauskas ◽  
Asta Saboniene
Keyword(s):  
Risk Premium ◽  
Cost Of Capital ◽  
Manufacturing Sector ◽  
Weighted Average ◽  
Cash Flows ◽  
Capital Cost ◽  
Equity Capital ◽  
Return On Equity ◽  
Long Run

The article is directed to determine the most appropriate method for evaluating cost of capital of a manufacturing sector and, using the methodology, to perform a case study of Lithuanian manufacturing sector. For evaluation of cost of capital, calculation of Weighted Average Capital Cost was chosen, as literature analysis distinguished this method as the most widely accepted and used. Some changes were made to the methodology of WACC evaluation in order to adapt the method for countries, which do not contain liquid, mature financial markets, like using country’s credit ranking to assess risk premium and adding this premium to base premium for maturelly developed equity markets. The case study of Lithuanian manufacturing sector was performed for the period of 2001-2016. Empirical study revealed that required rate of return on separate WACC components evolved differently between the years of 2001-2016. Average annual return on equity for the period 2001-2016 was 7.7%, while average annual return on debt was only 4.4%. In the year of 2015 weight of equity capital, first time during the analyzed period, exceeded 50%. In the same year, ratio of net profit before taxes to total assets of Lithuanian manufacturing sector also reached the highest value at the time, later surpassed in 2016. This fact demonstrates, that increased free cash flows from the operations were reinvested into further development of the companies. To maximize value of the shareholders, it would be preferable to pay out portion of earnings as dividends and finance growth with debt, as it is currently a cheaper alternative.

Capital Structure, Cost of Capital, and Voluntary Disclosures

2011 ◽  
Vol 86 (3) ◽  
pp. 857-886 ◽  
Author(s):  
Jeremy Bertomeu ◽  
Anne Beyer ◽  
Ronald A. Dye
Keyword(s):  
Capital Structure ◽  
Voluntary Disclosure ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Negative Association ◽  
Voluntary Disclosures ◽  
Disclosure Policy ◽  
Cash Flow Volatility ◽  
Information Advantage ◽  
Investment Grade

ABSTRACT: This paper develops a model of financing that jointly determines a firm’s capital structure, its voluntary disclosure policy, and its cost of capital. Investors who receive securities in return for supplying capital sometimes incur losses when they trade their securities with an informed trader. The firm’s disclosure policy and the structure of its securities determine the information advantage of the informed trader and, hence, the size of investors’ trading losses and the firm’s cost of capital. We establish a hierarchy of optimal securities and disclosure policies that varies with the volatility of the firm’s cash flows. Debt securities are often optimal, with the form of debt—risk-free, investment grade, or “junk”—varying with the firm’s cash flow volatility. Though the model predicts a negative association between firms’ cost of capital and the extent of information firms disclose, more expansive voluntary disclosure does not cause firms’ cost of capital to decline. Mandatory disclosures alter firms’ voluntary disclosures, their capital structure choices, and their cost of capital.

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