ACF 5: Capital Structure & Corporate strategy

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  • Created by: charlie
  • Created on: 03-05-18 09:56
Stakeholder theory
Looking beyond just maximising company value for shareholders, firm needs to take into account non-financial stakeholders in deciding optimal capital structure
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Power of non-financial stakeholders e.g. Norther Rock/ Chrysler
1) NR:announced business as usual (+ve) but BBC announced BoE assistance (-ve) = liquidity crisis/ 2) Chrysler gov intervention (-ve) + has to offer rebates on cars (cost of financial distress)
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Cost of financial distress to non-financial stakeholders
1) Quality perceived (quality unknown, high debt = perceived low quality) 2) Unable to attract + retain capital (wages/ workforce size) 3) Lack of business from stakeholders (strain to honour implicit contracts)
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Financial distress (high debt/ equity levels) is more costly for...
1) Product where quality is important but unobservable 2) Products requiring future servicing 3) Employees + suppliers requiring specialised capital/ training
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Increasing debt affects competitive strategy depending on...
1) The industry 2) How others interpret the signal
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Highly levered firms competitive strategy in uncertain industry
AIMS FOR... aggressive/ risky strategy (expanding production decreases competition) IN REALITY... less aggressive/ safer strategy (financing constraints)
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Competitors of highly levered firms take advantage
SHOULD... accommodate + decrease production (highly levered firms tendency to take high risks) REALITY... ignores + increases supply = lowers prices (knowing financial constraints of highly levered firm) + pushes them out of the market
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Increasing debt effect on: total assets/ MV/ Book Value/ Durables/ NCA/ Unionisation/ Firm Size
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Card 2

Front

Power of non-financial stakeholders e.g. Norther Rock/ Chrysler

Back

1) NR:announced business as usual (+ve) but BBC announced BoE assistance (-ve) = liquidity crisis/ 2) Chrysler gov intervention (-ve) + has to offer rebates on cars (cost of financial distress)

Card 3

Front

Cost of financial distress to non-financial stakeholders

Back

Preview of the front of card 3

Card 4

Front

Financial distress (high debt/ equity levels) is more costly for...

Back

Preview of the front of card 4

Card 5

Front

Increasing debt affects competitive strategy depending on...

Back

Preview of the front of card 5
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