Inside the risk management and corporate governance issues behind capital structure decisions Practical ways of determining capital structures have always been mysterious and riddled with risks and uncertainties. Dynamic paradigm shifts and the multi-dimensional operations of firms further complicate the situation. Financial leaders are under constant pressure to outdo their competitors, but how to do so is not always clear. Capital Structure Decisions offers an introduction to corporate finance, and provides valuable insights into the decision-making processes that face the CEOs and CFOs of organizations in dynamic multi-objective environments. Exploring the various models and techniques used to understand the capital structure of an organization, as well as the products and means available for financing these structures, the book covers how to develop a goal programming model to enable organization leaders to make better capital structure decisions. Incorporating international case studies to explain various financial models and to illustrate ways that capital structure choices determine their success, Capital Structure Decisions looks at existing models and the development of a new goal-programming model for capital structures that is capable of handling multiple objectives, with an emphasis throughout on mitigating risk. * Helps financial leaders understand corporate finance and the decision-making processes involved in understanding and developing capital structure * Includes case studies from around the world that explain key financial models * Emphasizes ways to minimize risk when it comes to working with capital structures There are a number of criteria that financial leaders need to consider before making any major capital investment decision. Capital Structure Decisions analyzes the various risk management and corporate governance issues to be considered by any diligent CEO/CFO before approving a project.
Preface xi Acknowledgments xv Chapter 1: The CFO s Role in the New Global Economy 1 The Decision-Making Process 2 Goals of a CFO s Team 5 A CFO s Constraints 6 Recent Issues in Capital Structure Decision Making 7 Summary 9 Chapter 2: Time Dimensions of Capital Structure Decisions 11 Sources of Funds 12 Cost of Funds 14 Cost of Loan Funds or Bonds 17 Summary 20 Chapter 3: Predicting and Evaluating a Firm s Performance 21 Income Statement 34 Balance Sheet 35 Cash Flow Statement 36 Funds Flow Statement 36 Significant Accounting Policies and Notes to Account 36 Ratio Analysis 37 Predicting Bankruptcy 41 Summary 43 Chapter 4: Maximising Value with Capital Structure Decisions 45 Value-Based Management Framework 46 Valuations 46 Variations in Cost of Capital 49 Formula-Based Approaches to Valuation 50 Summary 56 Chapter 5: Risk Dimensions to Capital Choices 57 Capital Sources 60 Types of Risk and Their Measures 61 Capital Choices and Risk Management 62 Requirement for Equity Capital and Risk 64 Framework for Risk Management 65 Summary 66 Chapter 6: Role of Off Balance Sheet Capital 67 Fixed-Asset Financing 68 Working Capital Financing Options 71 Effects on the Balance Sheet 82 Summary 84 Chapter 7: Innovations in Capital Structure 85 Forms of Financing 86 Financial Innovations 87 Summary 94 Chapter 8: Global Markets and Efficiencies in Capital Structure Decisions 95 Reasons for International Financing 96 International Bond Market 98 International Equity Market 99 Bank Loans 99 Financial Structure for a Global Firm 99 Doing Business in Select Countries: Political, Legal, Social, and Financial Aspects 100 Summary 125 Chapter 9: Theoretical Frameworks for Capital Structure Decision Making 127 Review and Synthesis of Theoretical Frameworks 127 Capital Structure Puzzles 131 Summary 138 Chapter 10: Strategic Determinants of Sources of Capital 139 Strategic Considerations 141 Mission and Vision 142 Strategic Targets and Objectives 144 Devising Strategic Capital 147 Motives for Issuing Equity 151 Motives for Issuing Debt 154 Motives for Issuing Foreign Debt 156 Motives for Issuing Convertibles 157 Factors Motivating Debt Maturities 158 Summary 160 Chapter 11: Economy-Driven Capital Structure Practises 161 Understanding Capital Structure Practises 161 A Firm s Access to Capital and Business 165 Capital Structure Decisions in Emerging Economies 168 Financial Structures Linked to Global Development Indicators 172 Present Global Markets and Capital Choices 175 Summary 178 Chapter 12: The Role of a Decision Maker in Capital Structure Decisions 179 Revisiting the Decision-Making Process 181 The Goals of a Decision Maker 183 A Decision Maker s Characteristics and Attributes Matter 185 Summary 190 Chapter 13: Behavioural Evidence of a CFO s Decision-Making Process 193 The CFO s Role in Indian Industry 194 CFOs Working Attributes for Capital Structure Decisions in India 197 CFOs Operational Aspects in the United States 200 Summary 203 Chapter 14: A Multiple-Objective Framework for Capital Structure Decisions: A Goal-Programming Approach to Decision Making 205 Evaluation of Mathematical Programming Techniques 206 Evaluation Techniques under Uncertainty 210 Model Specifications for Capital Structure Decision Making 214 Application of Goal-Programming Models for Capital Structure Decisions 216 Data Compilation for Model Development 217 Capital Structure Practises in India 219 Goal-Programming Model for Capital Structure Decisions Using Accounting Proxies 226 Case 1: 1 Co. (Alpha One Company) in the Agriculture Industry 227 Summary 236 References 237 About the Author 245 Index 247