Leverage in an International Setting

The general business environment may differ from one country to another, and these country-specific factors have a significant impact on determining a company’s capital structure. Taxes, regulations, and traditions can explain the different degrees of leverage in the two countries….

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Effects of Capital Structure Policy

When evaluating the capital structure of a company, an analyst must consider the following: The capital structure of the company over time. The financial analyst can evaluate the company’s ability to handle its financial obligations, considering the industry the company…

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Capital Structure Cost Considerations

Proposition I with Taxes: The Tax Shield A tax shield is the deliberate use of taxable expenses to offset taxable income. The interest expense on debt provides a tax shield that results in savings that enhance the value of a…

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The Modigliani-Miller Propositions

A firm’s capital structure is the mix of debt and equity the company uses to finance its investments. The goal of a capital structure decision is to determine the financial leverage that will maximize the value of the company by…

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Capital Budgeting Pitfalls

Here are some of the most common mistakes managers make when evaluating capital budgeting decisions: Economic responses: Failure to incorporate economic responses into investment analysis can greatly affect the profitability of the investment. Attractive investments entice competitors to enter, consequently…

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Types of Real Options Relevant to a Capital Projects

Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. Likewise, real options are capital budgeting options that allow managers the right, but not…

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Sensitivity Analysis, Scenario Analysis and Simulation Analysis

Simulation analysis, scenario analysis and sensitivity analysis are all stand-alone risk measures that depend on the variation of the project’s cash flows. Sensitivity Analysis Sensitivity analysis involves assessing the effect of changes in one input variable at a time on…

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Project Analysis and Evaluation

Mutually Exclusive Projects with Unequal Lives Mutually exclusive projects compete for resources and management can therefore only pick one or a few out of a group of profitable projects. Usually, the project(s) with the highest NPV is (are) the most…

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Effects of Inflation on Capital Budgeting Analysis

Inflation affects the analyst’s decision on whether to run the analysis in nominal or in real terms where nominal cash flows include the effects of inflation and real cash flows are adjusted downward to remove the effects of inflation. A…

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Expansion Projects, Replacement Projects and Depreciation

Expansion Projects An expansion project is a capital project that involves a company increasing its business size. Expansion projects are independent projects because they do not affect the cash flows of the rest of the company. Cash flows of expansion…

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