沃顿 高级公司理财学cpstr09.pptVIP

Fin 203: Capital Structure * Benefits of Debt Tax advantage: interest on debt is tax deductible Because interest is tax deductible the firm wants to issue as much debt as possible Incentives: discuss later Signal of management confidence: come back to this also Fin 203: Capital Structure * Cost of Debt Risk of costly financial distress and bankruptcy If principal and or interest on debt is not paid the firm is in default Financial distress arises when the firm either defaults on a debt payment or is in danger of defaulting because of low cash flow Fin 203: Capital Structure * Costs of Debt The possibility of a default is created by the fact that the cash flows generated by the assets are risky: they may not be sufficient to allow the firm to pay debts owed to the firm’s creditors. Fin 203: Capital Structure * Cost of Debt A default may lead to bankruptcy, a formal legal process The firm may declare itself bankrupt Creditors who have not received a principal or interest payment may force the firm into bankruptcy Bankruptcy may mean liquidation: Chapter 7 Bankruptcy can also mean reorganization: Chapter 11 Fin 203: Capital Structure * Cost of Debt If a firm defaults but the firm chooses not to declare bankruptcy and no unpaid creditor chooses to force the firm into bankruptcy, the default may not lead to bankruptcy Payments may simply be rescheduled The debt may be restructured Fin 203: Capital Structure * Cost of Debt A firm in danger of defaulting because it experiences low cash flow may ask its creditors for a rescheduling of its payments or a restructuring of its debt before defaulting. In this case, the firm is in financial distress, but there is no default and no bankruptcy Fin 203: Capital Structure * Cost of Debt Why is financial distress costly? First creditors may well get less than the fixed payments promised by the debt contract If the firm is liquidated it is worth less than the amount due the creditors because the assets may be illiquid, they can w