Lecture 20 Chp13&14 Sources Fin & Cap Struct

8/8/2019 Lecture 20 Chp13&14 Sources Fin & Cap Struct

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Sources of FinanceSources of Finance

&& Capital StructureCapital Structure

Chapters 13 & 14Chapters 13 & 14





3

Financial Markets

MONEY MARKETS

±Mainly for ST (<3 yrs) finance and mostly over

the phone

± Include investment & commercial banks &

finance houses

±Money markets deal in financial instruments

with a life of less than three years

CAPITAL MARKETS

± Mainly for LT (> 3yrs) finance (e.g. JSE and ALTX -

shares and debenture issues)



4

Primary, Secondary & Formal

Markets

Primary markets - New share/debentureissues (e.g. new JSE listing)

Secondary market Deals in previously

issued securities (e.g. buying/selling of shares on JSE)

Formal markets E.g. JSE, ALTX, SAFEX &

Bond Exchange of SA are highly regulated,specialising in a narrow range of standardised instruments accessible tosmall investors



5

Informal Over-the-Counter (OTC) Markets

Informal deals on OTC markets occur across a

desk or by using computer terminals &

telephones.

Most formal exchanges started as informal OTC

markets

Informal/OTC markets permit innovation/

flexibility according to needs of parties

Standardised instruments (e.g. OTC trading of currencies) do not need formal exchanges to

trade efficiently



6

Spot and Derivative Markets SPOT MARKETS trade instruments at agreed prices immediately

DERIVATIVE MARKETS defer settlement to a future date

Derivatives are used to manage risk (hedge), speculate & arbitrage

They are Flexible, have Low cost and offer significant Leverage and

Liquidity

Exchange traded derivatives.

Options and warrants are traded on the JSE and futures and

options on SAFEX.

Have Standardised contracts, marking to market and high levels of

liquidity.

Non-exchange traded derivatives are

Negotiated and customised, non-standardised and not traded on

an exchange. Examples are forward contracts, forward rate

agreements (FRAs) and swaps.



7

Interaction between market classifications

Markets classifications do not make themmutually exclusive. E.g. The sale of 1000Barloworld shares could be designated tothe following markets:

±capital shares are long-terminstruments;

±secondary money is exchanged forshares (Barloworld is not involved)

±spot money is exchanged and the scripdelivered immediately;

±formal shares are sold through a broker

on the JSE.



8

JSE Securities Exchange (JSE)

The JSE was formed as a market for shares of the many mining and financial companies formed after thediscovery of gold in SA

The JSE is SAs only stock exchange and governed by theSecurities Services Act, 2004 and its own rules and

directives

Trading on the JSE was in the form of an auctioninvolving brokers

In 1996 the JSE introduced electronic share trading (JET)

system From July 1999 JSE introduced the Share Transaction

Totally Electronic (STRATE) project, allowing transactionsto be settled and traded electronically

From Feb 2002 all JSE counters had moved to STRATE



9

JSE Listing Requirements Main Board

Subscribed capital at least R25m (not <25m shares)

Audited 3 year profit history last < R8m NPBT

Not <500 public shareholders (not employees/associates)

Not <2

0% of shares to be held by

the public Compliance with King II on Corporate Governance ± Audit committee / remuneration committee /separate

chair & CEO Compliance with International Reporting Standards

New requirements on auditors Independent directors Related party transactions Disclosure of director share trading activities

D

irectors to ensure compliance with listing requirements



10

Placement of Shares (vs public offer)

Ordinary shares are sold directly to agroup of institutional investors

Proportionate ownership may be

diluted No underwriting - quicker than rights

issue or public offer

Control and strategic allocation of

shares

No prospectus required



11

Alternative Exchange - ALTX

AltX is a division of the JSE.

Market for small/medium sized companies.

Listing requirements less onerous and include: ± Share capital of R2m

± Public ownership = 10%

±Designated Advisor ± Induction programme for directors

Market Capitalisation of ALTX = R5bn. At Jan

2007 30 companies listed on AltX



12

JSE Liquidity What does market liquidity mean? Buy/sell large #

shares quickly at current price on secondary market. Why is market liquidity important? A primary market

(new issues) will not exist without efficient and liquid

secondary market

Significant increase in market liquidity from 5% in early

1990s to about 42% in 2006

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

28 50 67 39 71 22 101 23 42 82 87

Equity Capital Raised on the JSE (Rbn)



13

Capital is raised on the JSE?

New equity issues relate to assetacquisitions and restructurings

The number of new listings has fallen. Many de-listings on JSE in recent years.

JSE is still ranked 19th of worlds

exchanges ito market capitalisation(US$)

32nd in terms of market liquidity.



14

No. of companies listed on the JSE

Number of JSE listed companies fallen

significantly, mainly due to:

± restructuring by groups,

± unbundling,

± winding-up and

± mergers and acquisitions.

Delisted in recent years: I&J, BOE, McCarthy,

Genbel, Cadbury Schweppes, Safren, LTA

New listings 2006: Massmart, Kumba Resources,

Spar. Listing of Hulamin (Huletts Aluminium)



15

Instruments traded on the JSE

Shares - Approx. 400 companies are listed on JSE

Warrants ± Warrants are similar to options. Their values dependent on

the volatility of the underlying share, time to expiry, interestrates and exercise price

± Expire from 3-36

months ± Mainly issued by Deutsche Bank, Investec, ABSA, StandardBank and SG Securities - The issuer is also the market maker

± Bid-offer spreads are 0,5%

± Warrant positions are hedged directly in the share or options

markets ± Conversion ratio indicates how many warrants are required toacquire 1 underlying share.

Other securities traded include preference shares and fixedincome securities (YIELDX)



16

The South African Futures Exchange (SAFEX)

Merged with JSE in 2001 SAFEX is a division of JSE

It trades derivatives (futures/options)

Futures include Financial & Commodity Contracts Financial Futures contracts include futures contracts

on ALSI40 index, other indices and on individual

highly traded shares.

Agricultural markets division of SAFEX offers futures

contracts on beef and maize.



17

Bond Exchange of South Africa

Lists debt securities issued by government,parastatals and large companies.

Fixed & floating rate securities & Zero couponbonds

Interest normally payable semi-annually CPI linked bonds

Highly liquid turnover about 13 times in a year

Trading volume about R8-10 trillion pa (over R35

billion per day)(JSE turnover R6-9 billion pd). Why is the market favourable for the issue &

listing of new corporate bonds?



18

Rights Issues Inviting existing shareholders to subscribe for new

shares

% ownership remains constant if all shareholders take

up their rights

Issue price at a discount to current listed price Example

± Co. has 9m shares in issue. The current price is R6 and the

company wishes to raise R5m. The Co. plans to issue 1m

shares at R5. What is the value of a right?

± Current price is R6 and rights issue at R5 per share. Is the

value of each right R1?

± What is value of the company after the rights issue? PTO



19

Rights issue

Value of each right is 5,90 5,00 = R0,90

What is the signalling effect of rights issue?

No. of shares Price R

Existing 9,000,000 x 6.00 = 54,000,000

New 1,000,000 x 5.00 = 5,000,000

10,000,000 59,000,000

Theoretical value of shares after the rights issue = 59,000,000

10,000,000

= 5.90



20

Valuation of Rights

Alternatively, the value of a right may be stated as follows;

Value of right = ¼½

»¬-

«

1

)(

N

S Mc N

Where,

N = number of shares required to acquire rightMc = market price per shareS = subscription price per share

= ¼½

»¬-

« 10

)00.500.6(9

Value of right = 0.90



21

Financial Institutions

Markets require borrowers and lenders Financial institutions act as

intermediaries and tend to offer a global

package of services. Distinction betweentypes of institutions is fading

Commercial banking provides a variety

of services e.g. overdraft facility (ST finance), LT mortgages, Etc.



22

Investment Banking

Corporate finance services relating tomergers , corporate restructuring andraising of finance

Lending of a short-or medium-term nature

Money-market actively trading in money & forex markets for clients and for ownaccount

Public issues and the private placing of shares

Large amounts of loan finance can be raised



23

Venture Capital and Private Equity

Venture capital and private equity assist with

launching and developing business Venture capital and private equity markets are less

efficient than the public markets

± Transaction costs are far higher

± There are a small number of buyers and sellers

± There are no reporting requirements info is notfreely available

± There are different investment objectives of venture capitalists and private equity investors

± The risk of failure is higher than in formalmarkets



24

Private Equity Major private equity firms include;

± Brait ± Ethos

± Venfin

± Investec

± Foreign private equity funds are entering the market Shoprite, Consol Glass, Alexander Forbes and even

Edcon were private equity targets. Companies will beunlisted if a private equity transaction goes ahead.

Private equity firms provide expertise, organisefinancing and often increase the debt levels of firms

Private Equity firms have a limited time horizon andwill exit by listing or selling the firm (ex. BTR Dunlopsold to a foreign firm) Venfin sold its stake in Vodacom

to Vodaphone.



25

Industrial Development Corporation

The IDC expects a meaningful contribution fromthe owner

The owner must share the risk by funding 33% of total assets

The IDC considers loan finance which is equal toowners interest in the business

Development is emphasized

Empowerment related financial buy-ins ortakeovers

Focus on fixed assets and greenfield projects Impact on job creation and exports

Ex. Sasol / Iscor



26

Business Partners

Business Partners was formed toguide and promote entrepreneurship

Focus on small business

It will invest between R150 000 and

R15m depending on the owners

contribution, risk and collateral Insist on Equity participation



27

Public enterprises

Public Investment Corporation

±Increased profile / active shareholder

±Assets under management > R600

billion ±Financing of BEE transactions

±Isibaya Fund

National Empowerment Fund (NEF)

Khula Enterprise Finance



28

Equity-Related Instruments

Ordinary share issue (Ks)or use retained earnings (Kr)ORDINARY SHARES K E = (D1/P0)+g (Issue cost P0= P0(1-F)

Or K E = Rf + ß(Rm - Rf)

Offer capital growth (P1- P0) and dividends (D1) income

Return (dividends plus capital growth) exceeds that oninterest-bearing instruments (Kd). Why? Higher risk

Most investors tend to be pension funds and insurance

companies

Share Issue Expenses include: Listing fee, Advertising,brochures/prospectuses, Professional fees (legal, audit,

stock broker and JSE fees), Bankers Fee, Underwriting

Commission (2-3%, Taxes and Duties



29

Retained Earnings K E = (D1/P0)+g (No issue cost)

Cost of retained earnings = the cost of new equity Retained earnings vs dividends (dividend cover/payout ratio)

Immediate source of finance with no flotation/issue cost

Shareholders will forego dividend if expected future growth

Preference shares Hybrid of equity and debt

Fixed dividend payment not compulsory

Nominal rate may be based on after-tax rate for LT debt (No tax)

Preference shares are useful when tax positions of parties differ. ± Participating (fixed dividend plus share in remaining profits) ± Redeemable or Indefinite ± Convertible to ordinary shares

± Banks may subscribe at rate equal to7

0-7

4% of the primerate.(STC credit).



30

Debt-Related Instruments

MT finance = 1 to 3 years Long-term finance 5 and 10 years

Classification of Debt :

± Fixed Interest, e.g. debentures

± Variable interest fluctuates with market forces- e.g.mortgage bonds

± Secured debt

± Debt covenants (Debt/Quick ratios, overall debt,

dividend payments/cover)

± Unsecured debt

± Covertible, redeemable, indefinite & participating



31

Structuring the repayment of loans

Instalments versus Bullet (Residual) payment.E.g. Loan of R8m at 11% repayable in

instalments or single pmt at end. Cash flows?

Principle: Consider risk & cash flows from

underlying asset.

Cash Flows 0 1 2 3 4 5

Loan with equal instalments -2,164,562 -2,164,562 -2,164,562 -2,164,562 -2,164,562

or

Loan with capital payable at end of term -880,000 -880,000 -880,000 -880,000 -8,880,000

R8 m /3, 6 96

1 1 % x R8 m = R8 8 0 0 0 0



32

Debentures Debenture trust deed specifies terms (payments, interest,

security) Trustees represent debenture holders

Restrictive covenants (PTO)

Mortgage bonds LT loan secured over fixed property

Terms vary

Restrictive covenants



33

Credit Ratings

Standard & Poor / Moody provide independentratings of the risk of bond issues

If a bond issue is rated AAA what is theprobability of default?

What is the spread on the Barloworld bond issue?Go to www.bondexchange.co.za. Check up BAW1under Data services MTM report. Ex. On 1 Feb2007, yield is 8.86% which is at a premium of 80

basis points (0.8

%) above the R15

3 (govt. bond)yield.

What will Barloworld do with its divisions?.



34

Commonly used to fund movable assets

Lessor retains legal ownership of the asset until paid

Lessee has use of the asset for part or full useful life

Lease payments include capital plus TVM (return)

ST Debt ST finance matches seasonal/cyclical Wcap cycle

ST finance = form of bridging finance

AP provide part of seasonal/cyclical finance needs

Short-term finance = higher risk than long-term finance Sources: Overdraft, BA (90 day Acceptances)

Bills and Notes

Foreign loans interest rates < RSA Cost of forward

cover could eliminate cost advantage

Leases



35

± Equity has a residual right to income & Ke>Kd

± Cost of debt is tax deductible ± Debt - contractual right to capital/interest when

due, profit or not & restrictive covenants

± STC payable on net dividends paid-personal, not RI

± Debt tends to have a finite life no affect on %SH

± Life of equity= life of the firm

± Equity holders control the entity

± Cap. structure = debt & equity (Risk profile Ke/d)

± Debt increases risk (fin. Distress) & return (leverage

when ROA >Kd)

± Signalling effects of a rights issue may be negative

Debt & Equity



36

BEE Financing structures Industry charters

Section 38 Now financial assistance tobuy shares

Source of financing for BEE entities

±Vendor financing (shares, prefs, loans orbonds)

±BEE entity issues pref shares to banks at70-74% of prime & use entity assets assecurity or Initial public Offering(IPO)



37

BEE Financing structures

BEE Holdings Ltd

100%R30m

Originalshareholders

SPV LtdR510m

Prefs

49% 51%

Metro Ltd





39

Levels of Equity Control

±75% of share capital allows passing of specialresolutions

±50% + share - enables the passing of ordinary

resolutions ±20% or 30% of share capital = effectivecontrol listed coy

± 35% = effective control in terms of the

Takeover Code ± Control of the board

±Default Arrears Pref dividends have voting

rights



Capital structureCapital structure

Chapter 14Chapter 14



41

Learning outcomes Leverage increases return (if ROA>Kd) - potential loss to

SHs Debt increases financial risk.

No optimal capital structure under certain assumptions.

Inclusion of tax, distress and other costs alters optimal

capital structure.

Theory of capital structure - practical situations.

Pecking order approach.

Effect of inflation on the cost of debt. Optimal capital structure and need for flexibility.

Tax shield makes debt more attractive within risk

attitudes



42

Financing Decision

Separate Investment and financing

decisions

Balance Sheet: Assets = Equity + Liabilities

(mainly debt)

Financing of assets (D/E ratio) is a strategic

decision (+types of debt & equity

capital structure. Big Q uestion? Does capital structure

affect entity value?



43

Business Risk Determined by operating activities, industry

and product range, e.g. retail store vs softwaredeveloper

Risk = level of fixed to variable costs i.e.operating leverage = Total contribution/EBIT

Balancing Business and Financial risk ± Match long-term assets with long-term finance

Financial risk

DE ratio i.e. Interest rate and capital risk Equity financing dividends and capital growth

Debt = LT&ST Contractual interest & capital dues

± Secured or unsecured



44

Operating Leverage Example: FC R100 000 ; V C R4 pu; SP R10 pu; Volume 30 000 Upa

Contribution: 30 000 x (R10-R4) = R180 000 EBIT is R80 000 (R180 000 - R100 000)

Level of Operating Leverage = R180 000/80 000 = 2,25

Every 1% increase (fall) in sales/contribution = a 2,25% increase(fall) in EBIT.

Current Forecast Increase

Sales , , 10.0%

Variable costs - , - , 10.0%

Contribution , , 10.0%

Less: fixed costs - , - ,

EBIT , , 22.5%

Operating leverage % / % 2.25

Operating leverage , / , .



45

Financial Leverage Debt levers net earnings up or down if ROA>Kd

Example: Co. A is 100% equity financed & Co. B has D:Eof 40:60 Kd =12,5%.

As the firm is borrowing at 8.875% (12.5% x 0.71) aftertax and earning a ROA of 28%, this results in an increasein the ROE to 41.4%.

Note: ROA = EBIT(1Note: ROA = EBIT(1--t)/Total Assetst)/Total Assets

(Rm) Co. A Co. B

Equity 1,000 600

Debt - 400

Total Assets 1,000 1,000

EBIT 400.0 400.0

Interest - -50.0

400.0 350.0

Tax -116.0 -101.5

Net income 284.0 248.5

Return on Assets 28.4% 28.4%

Return on Equity 28.4% 41.4%Interest rate 12.5%



46

Degree of Financial Leverage?

DFL on net income: = EBIT/(EBIT - I)

E.g.: U se example below plus interest cost of R16 000

± DFL = R80 000/R64 000 = 1,25

When EBIT changes 1% NIBT changes by 1,25%

D

FL = R8

0 000/R6

4 000 = 1,25

22,5

x1,25

= 28

,125

R Current Forecast Change

Sales 300,000 330,000 10.0%

Variable costs -120,000 -132,000 10.0%

Contribution 180,000 198,000 10.0%

Less: fixed costs -100,000 -100,000

EBIT 80,000 98,000 22.5%

Interest -16,000 -16,000

Net Income 64,000 82,000 28.1%

Tax at 29% -18,560 -23,780

Net Income after tax 45,440 58,220 28.1%

X

2,25

X1,,25



47

Degree of Combined leverage (DCL)

D

CL = combined effect of D

OL &D

FL ±DCL = Contribution/(EBIT - I) or (DOL x DFL)

Example: DCL = R180 000/R64 000 = 2,8125

Or DCL = DOL(2,25) X DFL(1,25) = 2,8125

+10% in sales = +28,1% NIBT and NIATR000 Current Forecast Change

Sales 300,000 330,000 10.0%

Variable costs -120,000 -132,000 10.0%

Contribution 180,000 198,000 10.0%

Less: fixed costs -100,000 -100,000

EBIT 80,000 98,000 22.5%

Interest -16,000 -16,000

Net Income 64,000 82,000 28.1%

Tax at 29% -18,560 -23,780

Net Income after tax 45,440 58,220 28.1%



Negative effect of financial leverage?

Effect of high leverage when economy down

Co. A & B have operating income of R20m. Co. B

has fixed interest of R44m charge. ROA & ROE?

EBIT x 0,71 = R14,2/1000 Assets = 1,42%

(' m) Co. A Co. B

EBIT 20.0 20.0

Interest - -44.0 20.0 -24.0

Tax -5.8 -

Net income 14.2 -24.0

Return on Assets 1.42% 1.42%

Return on Equity 1.42% -4.00%

ROA = EBIT(1ROA = EBIT(1--t)/Total Assets Debt B = 400t)/Total Assets Debt B = 400

ROE = NIAT/EquityROE = NIAT/Equity EqEq uu ityity A=1000 & B=600A=1000 & B=600



49

Financial leverage & risk

Avoid debt in uncertainty and variableoperating returns

Low risk operating cash flows should

encourage higher levels of financialleverage.

Match asset terms with finance terms. ST

financing may not be renewed andcompounds financial risk



50

C a p i t a l s t r u c t u r e

Equity

± Share capital

± Reserves

± Outside shareholders interest

± Deferred taxation

Debt

± Long term liabilities

± Interest bearing debt ± Permanent portion of other current liabilities?



Capital structure: Traditional (Trade off)



52

Capital structure: Traditional (Trade-off)

approach

Ke and Kd stay unchanged asD

ebt soW

ACC until Ke and Kd increase from financial risk.

Debt ratio with lowest WACC = Optimal capital structure

Effect of NOI approach (M&M) on WACC & Ke?

WACC remains constant and Ke rises as D/E ratio



53

M&M and Arbitrage Co. A and Co. B incomes and values.

V e = 0,9m/0,2 = R4,5m and 0,6/0,2 = R3m

V d = 0,3m/0,15 = R2m

Investor with 10% of B can sell for R0,3m (Ve), borrowR0,15m and buy 10% in A for R0,45m

Re in A is R67500(R90000 22500 Interest)vs R60 000 in

B with less or equal risk (borrow Ro,2m).

M & M - N OT s u st ai na bl e! ?

C o . A C o . B

N e t e r t i I c e 9 , 9 , I t e r e s t - - 3 ,

A il le t s h r e h l e rs 9 , ,

V l e f E q ity , , 3 , ,

V l e f D e b t , ,

V l e f c y , , , ,





55

M&M with taxes With taxes, the WACC falls as D:E increases

Where is the flaw in this? Ke > Kd(1-t)D



56

M&M with taxes ±Too much debt increases the cost of financial

distress. ±Too much debt could reduce EBIT.

±Too much debt will incur agency costs.

±Too much debt will lead to an increase in Kd

VL = VU + PV I - PVF - PVEBIT - PVA - PVD

P V I = P V of expected interest tax shield

P V F = P V of expected financial distress P V EBIT = Reduction in value from lower EBIT

P V A = Reduction in value from agency costs

P VD = Reduction in value from increased cost of debt



57

Effect of financial leverage on Vo Initially, interest tax shield increases returns/value up to point X.

Value starts falling as financial distress and other costs increase



58

Capital stru ct u re: Contemporary approach.Consistent with M&M, with taxes, and financial

distress and related costs

Ke as DFL (initially little change).

D/E ratio influences lenders willingness to lend



59

Pecking Order Theory No target capital structure

Financing follow a preferred hierarchy:

1. RI is 1st preference of financing

2. 2nd debt/loan finance

3. Convertible debt/preference shares4. Lastly, the issue of new equity

Why? Limit sharing of control and residual income!

RI has no control or covenant compliance issues

Debt will result in loan covenants and reporting to lenders

New equity may impact on control and greater market scrutiny

Info asymmetry reflects presently mispriced securities

Issue equity when ordinary share prices are high



60

Financial leverage and systematic risk(ß)

ß=systematic risk, affected by financial leverage.

ßL = ßU [1+(D/E)(1-t)] & ßU = ßL/[1+(D/E)(1-t)]

Effect of inflation

Real return(r)=9% & inflation(f)=10%. Nom.rate(Rn)? Rn = (1+r)(1+f)1 = [(1+,09)(1+,1)]1=0,199 19,9%

Nominal rate(Rn)=19,9% & inflation(f) =10%. r?

r =[(1+Rn)/(1+f)]1 and [(1+,199)/(1+,1)]-1=9%

Real rate(r)=9% & nominal rate(Rn) is=19,9%. f?

f =[(1+Rn)/(1+r)]1 and [(1+,199)/(1+,9)]-1=10%

Tax deduction on nominal cost of debt

High inflation = appreciating assets & Interest

WACC Some Principles



WACC Some Principles W eighted average costs of all finance sources

Uses market rates of debt and equity at target D:E or MV

Includes corporate tax effects (Kd after tax)

Ke and Kd include inflation, so should expected cash flows

Real Return (r) (14%) = Risk-free (8%) + Risk (6%)

Nominal rate (Rn)(21%) =Rf (8%)+Risk (6%)+Inflation (7%)

Nominal rate (Rn) = (1 + r)(1 + f) 1



62

From the real world..

Grindrod

Target debt-equity ratio of 100% (50:50.)

Could company keep to this target?

Why not go to www.grindrod.co.za and check for the latest

debt-equity ratio?

158%

106%

29%

107%

61%

53%

33%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1999 2000 2001 2002 2003 2004 2005

Debt

%



63

Capital Structure : Signalling theory

Management use financing decisions to influence(signal) market perceptions and value of entity

± issue equity if shares perceived to be overvalued

or market considers debt too high

± Increase debt if market perception is underlevered

i l i i &



64

Capital restructuring in USA & Ve M&M assumes real investment & operating

Cflows unaffected by D

/E ratio i.e. Sameoperating decisions if debt is 80% debt or 0%

In reality dramatic in D/E and div. payoutratios directly affects MVe

LBOs active in late 1980s (huge debt burden) &restructured US economy. (disposal of non-coreassets)

Agency cost of free cash flow? If operating cash

and no +NPV projects need to return cash toSH or invest in low return projects or diversif y and destroy value.

Result: MVe by trillion US dollars. Will same

happen in RSA from BEE?

Effect of debt?



65

Effect of debt? Compulsory Interest & debt servicing costs versus

optional dividends

Bankruptcy Interest cost effects IS Ke does not. SA entities have too

little debt

Trend to reduce capital and DOL if DFL .

Problems of overcapacity lead to consolidation. Debt encourages sale of unrelated business entities

(unbundling)

Concentration of equity in the hands of insiders

Debt effects sales and implicit product warranties Growing entities need constant in capital debt is

not appropriate

Optimal capital structure is achieved with lower ratings

(M

V).

Why is debt low in SA entities?



Why is debt low in SA entities?

PPC has D/E ratio below 5% based on MV with cash balances nodebt

Same is true for Shoprite, Pick n Pay, Alexander Forbes etc.

SA Companies are buying-back shares for more realistic capital

structures - Not enough. The future = private equity firms buying out companies, incurring a

lot of debt, paying large dividends or buy-back shareVe

E.g. Manchester United. Glaser mostly used Manchester Utdsborrowing capacity to buy Manchester Utd. Why? The club wasungeared.

Documents

Lecture 20 Chp13&14 Sources Fin & Cap Struct