In this class, we started our discussion of the financing question by drawing the line between debt and equity: fixed versus residual claims, no control versus control, and then used a life cycle view of a company to talk about how much it should borrow. We then started on the discussion of debt versus equity by looking at the pluses of debt (tax benefits, added discipline) and its minuses (expected bankruptcy costs, agency cost and loss of financial flexibility). Even with the general discussion, we were able to look at why firms in some countries borrow more than others, why having more stable earnings can make a difference in how much you can borrow and why having intangible assets can affect your borrowing capacity.
Slides: http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/
Post class test solution: http://www.stern.nyu.edu/
Aswath Damodaran - Session 16: The Debt Equity Trade Off
See the full slides below.
