FIN简答

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Comparison of organizational forms: Business owners have some important decisions to make in choosing an organizational form. Whereas each business form seems to have some advantages over the others, the company has major advantages as the firm grows and thus needs to attract additional funding. The reason for this is that sole proprietors and partners have limited access to capital. In contrast, companies can access funds from external investors, through the capital markets. Because of limited liability, as well as the flexibility in dividing the shares (and the ease of transferring ownership through the sale of the shares) companies can pool the funds of large numbers of individual investors. Thus, the corporation is the ideal business entity in terms of attracting new capital, which makes it appealing to large and growing firms. In contrast, sole proprietors and partners generally have unlimited liability, which is a major deterrent to raising capital from owners. Therefore, when developing decision models in later chapters, it will be assumed that we are dealing with the corporate form of ownership. Similarly, the emphasis will be on the tax treatment that applies to companies, in terms of the impact of taxation on financial decision making. Break-even analysis, the focus of b-e analysis can be on the b-e quantity of sales volume, which arises from the firm’s cost structure, volume of output and profit, or on the b-e value of sales, which corresponds to the b-e quantity of sales volume. Specifically, The b-e sales volume or value is the amount that results in an EBIT amount equal to zero. Method 1:(1)sales – (total variable cost + total fixed cost)=operating profit(EBIT) (2)(P*Q)-[(V*Q)+F]=EBIT=$0 (3)Qb=F/(P-V) Method 2:(1)sales-(total variable cost+total fixed cost)=EBIT (2)S-VC/S*S-F=EBIT (3)S*=F/1-[(VC)/S]

Operating leverage: Business risk refers to the variability in the firm’s expected earnings before interest and taxes(EBIT). The responsiveness of the firm’s earnings before interest and taxes to sales changes. This responsiveness arises from the firm’s use of fixed operating costs. Degree of operating leverage from the base sales level(s)=DOLs =percentage change in EBIT /percentage change in sales

Financial leverage: Financial risk, on the other hand, is a direct result of the firm’s financing decisions and is reflected by (1) the additional variability in earnings available to the firm’s ordinary shareholders, and (2) the additional chance of insolvency borne by the ordinary shareholder caused by the use of financial leverage. Financial leverage, the use of securities bearing a fixed rate of return to finance a portion of the firm’s assets. Financial leverage can arise from the use of either debt or preference-share financing. The use of financial leverage exposes the firm to financial risk. Degree of financial leverage(DFL) from base EBIT level=DFLEBIT=percentage change in EPS/ percentage change in EBIT

Three basic views of dividend policy: View1: Dividend policy is irrelevant to share price. The amount of earnings paid out as dividends doesn’t affect share prices. First, it’s assumed that the company has made its investment and financing-mix decisions and that these decisions will not be altered by the amount of any dividend payments. Second, it’s assumed that ‘perfect’ capital markets exist. Shareholders are concerned only with the amount of total returns resulting from the company’s investment decisions and are indifferent to whether they receive these returns as dividends now or later as capital gains. View2: High dividend payout increases share price. The second view argues that the cash flow shareholders receive from dividends is more predictable than converting capital gains


to income. The view that dividends are less risky than capital gains, and should therefore be more highly valued, has its critics. View3: Low dividend payout increase share price. The third view of dividend policy proposes that dividends have a negative effect on share prices largely due to differences in the tax treatment of dividend income and capital gains. Many shareholders may prefer a company to retain its earnings and provide them with capital gains as opposed to cash dividends.

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