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Debt (in the form of bonds) has some advantages over equity as a way of raising money, since it can have tax benefits and can enforce a cash discipline. The reduction in equity also makes the firm less vulnerable to a hostile takeover. Leveraged recapitalizations can be used by public companies to increase earnings per share.
The remaining long-term debt is used in the numerator of the long-term-debt-to-equity ratio. A similar ratio is debt-to-capital (D/C), where capital is the sum of debt and equity: D/C = total liabilities / total capital = debt / debt + equity The relationship between D/E and D/C is: D/C = D / D+E = D/E / 1 + D/E
Bond valuation is the process by which an investor arrives at an estimate of the theoretical fair value, or intrinsic worth, of a bond.As with any security or capital investment, the theoretical fair value of a bond is the present value of the stream of cash flows it is expected to generate.
It is important that a company's management recognizes the risk inherent in taking on debt, and maintains an optimal capital structure with an appropriate balance between debt and equity. [9] An optimal capital structure is one that is consistent with minimizing the cost of debt and equity financing and maximizing the value of the firm.
An appropriate capitalization rate is applied to the excess return, resulting in the value of those intangible assets. That value is added to the value of the tangible assets and any non-operating assets, and the total is the value estimate for the business as a whole. See Clean surplus accounting, Residual income valuation.
Interest rate changes: short-term vs. long-term debt The amount may only add up or save you a few hundred extra dollars over the life of a short-term loan like a personal loan.
Zero-coupon bonds pay no interest over time but are sold at a discounted face value. Zeros may be a good option for investors looking to meet a financial goal down the road, as they lock in a set ...
These types of recapitalization can be minor adjustments to the capital structure of the company, or can be large changes involving a change in the power structure as well. As with other leveraged transactions , if a firm cannot make its debt payments, meet its loan covenants or rollover its debt it enters financial distress which often leads ...