İŞLETME FİNANSI II

Firms can either borrow from financial intermediaries such as banks or they can issue corporate bonds to raise debt financing. Debt financing occurs when a firm raises money for working capital or capital expenditures by issuing corporate bonds to raise debt financing. 

Firms raise equity funds from their shareholders, who own a direct share of the net income and the net worth of the company. As shareholders hold residual claims on both the earnings and the assets of the business.

Financial risk is the additional risk borne by the stockholders when the company raises debt financing. As debt holders have prior claims in sharing the earnings and the assets of the firm, the use of debt capital (financial leverage) concentrates all of the business risks on the stockholders, putting equity capital to more risk than if the company were all equity financed. Therefore, financial leverage rises the cost of equity investments.

As the main goal of investors is wealth maximization, companies seek to attain an optimal capital structure which maximizes the firm value. However, there cannot be a prescribed optimal capital structure for any business because there are many different factors influencing the capital structure decisions. Even for a single company, the optimal capital mix might require variations in the level of financial leverage over time in relation to changing market forces as a , economic environment, industry specific factors and firm-specific factors.

The economic conditions in general impact the investment and financing decisions simultaneously. The economic policies of the country where the company is established to determine the market conditions shaping up both the forces of demand and supply. The political and economic stability affect the level of risk at the macro and micro levels. The inflation rate leads to the interest rate. Furthermore, the tax rates directly impel the level of investments and financing mechanisms. Risk escalates in an economic

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations.

Financial leverage is an indicator of financial risk and occurs in case of borrowing

ROIC=NOPAT/Capital (ROIC means return on invested capital)

The debt and equity mix is called the capital structure of a firm.

The level of the fixed costs in total costs which are measured by the degree of-operating leverage.

The signaling theory asserts that investors regard an equity issue negatively and usually the stock price falls.

The variance in the ROIC is an indicator of the business risk and a higher variance demonstrates a higher business risk.

There are no taxes is one of the assumptions of Modigliani and Miller Capital Structure Theory

Asymmetric information occurs when one party from a financial transaction has different information than the other.

Bankruptcy risk refers to the likelihood that a company will be unable to meet its debt obligations.