Episode Details

Session Description: There are only two ways that a business can be fund itself - your own money (equity) and borrowed money (debt). In this session, I look at the tradeoffs - illusory, financial and friction-driven - that drive the trade off between debt and equity, and how it plays out across the life cycle. I move on to to look at the right type of debt a firm, as one that matches its assets, and use this insight to look at why debt design is different for growth as opposed to mature firms.
Slides: https://pages.stern.nyu.edu/~adamodar/pdfiles/CLC/slides/Ch7.pdf
Exercise:
a.     Evaluate the mix of debt and equity used by each of your companies to fund their businesses.
b.     If your company has debt, what type of debt does it have? (Debt maturity, currency, straight or convertible etc.)
c.     What tax benefits to each of your companies get from debt? (Look at marginal and effective tax rates, whether the company is making money, net operating losses carried forward)
d.     What is the expected bankruptcy cost from debt to each firm? (Look at volatility in earnings, current bond ratings if any, interest coverage ratios)?

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