Capital Structure and Corporate Strategy参考.ppt

The most important question in this area is that Does Debt Make Firms More or Less Aggressive. The attractiveness of the aggressive pricing strategy depends on the level of debt. DRAFT CONFIDENTIAL DRAFT CONFIDENTIAL DRAFT CONFIDENTIAL DRAFT CONFIDENTIAL CHAPTER 7 Capital Structure and Corporate Strategy 7.1 The Stakeholder Theory of Capital Structure Nonfinancial stakeholders Nonfinancial stakeholders are the associates of a firm, who do not have debt or equity stakes in the firm, but have a stake in the financial health of the firm. These include Firm’s customers Firm’s suppliers Firm’s employees Overall community in which the firm operates (government, competitors). These stakeholders can be hurt by a firm’s financial difficulties. Therefore they are not willing to do business with a firm in financial distress. To avoid the difficulties in doing business during financial distress, firms have to use less debt financing. Financial Distress Hurts Nonfinancial Stakeholders Firms in financial distress are more likely to go bankrupt, which has spillover costs imposed on the nonfinancial stakeholders of the firm. Customers concern the quality of the products purchased from a firm in financial distress and worry about the availability of the services associated with the product after purchase. Employees of firms in financial distressed are highly likely to lose their jobs and low opportunity for career advancement. Suppliers may lose their business when the firms in financial distress go bankrupt. Example: Tax Gains and the Effect of Debt on Product Prices Suppose that Apple produces computers at a cost of $2,000 and sells them for $2,400. Apple is considering a large increase in financial leverage that will increase the firm’s probability of bankruptcy from zero to 10 percent, but will save the firm $58 million per year in taxes as a result of tax deduction, given its 40 percent corporate tax rate. But if the customers believe the bankruptcy is certain, the computer