CHAPTER 8
ANALYSIS OF FINANCING CHOICES

FRAMEWORK ANALYSIS

Several key elements must be considered and weighed when company is faced with raising additional long-term funds. We’ll take up five of these in some detail:
▪ COST.
▪ RISK EXPOSURE.
▪ FLEXIBILITY.
▪ TIMING.
▪ CONTROL.

COST OF INCREMENTAL FUNDS As a general rule, we found that funds raised through various form of debt are least costly in specific terms. In part because the interest paid by barrowing company is tax deductible under current laws. The actual rate of interest charged on incremental debt will depend, of course, on the credit rating of the company and on the degree of change introduced into the capital structure by the new debt. In other words, the specific cost will be affected not only by current market conditions for all long-term debt instruments, but also by the company specific risk as perceived by the underwriters and investors.

RISK EXPOSURE If we use variability of earnings as a working definition of risk. We find that a company’s risk is affected by the specific cost commitments, such as interest on debt or dividends on preferred shares. That each funding source entails. These commitments introduce financial leverage effects in the company’s earnings performance, or will heighten any financial leverage effects in the company’s earnings performance, or will heighten any financial leverage already existing. FLEXIBILITY The range of future funding options that remain once a specific alternative has been chosen. As each increment of financing is completed. The choice among future alternatives may be more limited on the next round. Flexibility essentially requires forward planning, careful consideration must be given to strategic plans and matching corporate financial policies. Potential acquisition,