FIRM & Financial Markets

Jun 18th, 2015
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1. Optimal mix of debt and equity should minimize hurdle rate. Then, u can take more investments and ur existing become more valuable. 2. Which debt is right for me?? Be it short term or long term, floating or fixed, yen or dollar. Ans: depends on what kind of investment u r doing. Is it long term investment or u r doing in yen or dollar. Hence, It depends.

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1. Optimal mix of debt and equity should minimize hurdle rate. Then, u can take more investments and ur existing become more valuable.2. Which debt is right for me?? Be it short term or long term, floating or fixed, yen or dollar. Ans: depends on what kind of investment u r doing. Is it long term investment or u r doing in yen or dollar. Hence, It depends.3. Thee focus of corporate finance changes with company life cycle..Growth companies / mature companiesThis is the answer to the question posed in the previous overhead.1. Maximizing the value of the business is the most general objective function. Remember that value of the business includes assets in place and growth assets. If you are managing a growth company,, increasing earnings may not necessarily increase firm value. The other problem is that firm value itself is a difficult number to estimate. While there are models available, they all need inputs, most of which allow for subjective judgments.2. Managers answer to stockholders. Consequently, the objective gets narrowed down to maximizing equity value. (Implicit assumption: Bondholders/ Banks can protect themselves by writing in covenants and setting interest rates).3. It is tough to assess equity value objectively. It would be nice to have a third party estimate that is objective. For publicly traded firms, the market (in spite of all its limitations) provides such an estimate. (Implicit assumption: Markets are rational and reasonably efficient)

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