Finance and Accounting - Capital Structure
Effectiveness and efficiency of operations
A. Select the best source of capital based on the University’s needs and market conditions.
- Are the services of investment bankers obtained to help research the optimum sources of capital?
- Are the following factors studied when considering various sources of capital: anticipated market conditions, effect on financial ratios, effect on credit rating, risk (reliability of the source of funds in the future), restrictions (debt covenants), flexibility, and expected inflation operations?
- Are the advantages of debt financing considered? (These include: no bondholder share of earnings; lower debt repayment costs during periods of inflation; no diluting effects; debt retirement prior to maturity due to call provisions; ability to sustain financial stability in markets where money is tight.)
- Are the disadvantages of debt financing considered? (These include: interest payments even when profits are low and losses incurred; debt repayment at maturity; higher debt that increases financial risk and interest costs; and indenture provisions that restrict activities.)
- Are the advantages of convertible securities considered? (These include: lower interest rates than straight debt; fewer financing restrictions; equity price higher than current market prices and more appealing to investors in a tight market; call provisions that force conversion when the market price exceeds the conversion price; and lower issuance costs.)
- Are the disadvantages of convertible securities considered?
B. Establish the optimal capital structure to minimize cost of capital.
- Are all factors relevant to evaluating the optimal capital structure investigated? (These include: asset makeup, debt-to-equity ratios, outstanding obligations, growth rate and stability of future sales, competition, expected rate of inflation, business risks, control status of owners and managers, and lender attitudes toward the industry and the University.)
- Is the weighted-average cost of capital utilized?
- Are low-cost foreign financing options considered? (These include: government grants
and incentive rate loans, joint ventures with foreign
companies, government incentives, and foreign subcontracting.)