PDF THE FINANCING DECISION .edu
[Pages:28]Aswath Damodaran
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THE FINANCING DECISION
You can have too much debt... or too little..
Debt Ratios across Companies
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Debt Ratios across Sectors
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The Financial Balance Sheet
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Assets
Existing Investments Generate cashflows today Includes long lived (fixed) and
short-lived(working capital) assets
Assets in Place
Expected Value that will be
Growth Assets
created by future investments
Liabilities
Fixed Claim on cash flows
Debt
Little or No role in management
Fixed Maturity
Tax Deductible
Equity
Residual Claim on cash flows Significant Role in management Perpetual Lives
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The Big Picture..
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Maximize the value of the business (firm)
The Investment Decision Invest in assets that earn a
return greater than the minimum acceptable hurdle
rate
The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to
fund your operations
The Dividend Decision If you cannot find investments
that make your minimum acceptable rate, return the cash
to owners of your business
The hurdle rate should reflect the riskiness of the investment and
the mix of debt and equity used
to fund it.
The return should reflect the magnitude and the timing of the cashflows as welll as all side effects.
The optimal mix of debt and equity maximizes firm
value
The right kind of debt
matches the tenor of your
assets
How much cash you can
return depends upon
current & potential investment opportunities
How you choose to return cash to the owners will
depend on whether they prefer dividends or buybacks
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Disney's Debt Load
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? At the end of 2013, Disney had $15.96 billion in debt outstanding.
? $13 billion in conventional interest bearing debt (with a book value of $14.3 billion
? $2.96 billion in operating lease debt (with no debt equivalent shown on the balance sheet)
? As a percent of its market value as a company, debt was 11.4% of its value. As a percent of book value, debt was 40% of value.
? As a multiple of EBITDA, debt was 1.3 times EBITDA.
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Tesla: Debt Load over time
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