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Essay / Research Paper Abstract
A 13 page paper discussing the effect of debt on the value of the firm, with a focus on the financial services industry and using Citibank as an example. As Citibank’s debt load has risen, so has its stock price and therefore its firm value. Because Citibank’s debt has increased to finance acquisitions, however, its assets also have increased during the same period. Citibank’s current ratio always remains at or around 1.0, indicating that it has not taken on more debt than can be beneficial. Certainly other factors enter into changes in firm value, but analysts view increasing debt financing of growth activities as a positive approach to conducting business. Bibliography lists 19 sources.
Page Count:
13 pages (~225 words per page)
File: CC6_KSfinDebtCapStruc.rtf
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Unformatted sample text from the term paper:
Of course the value of a firm is the value of all of its assets, which can be rather subjective, and at best is a
reflection of market value of all assets. In another view, the value of the firm is "the present value of the unlevered free cash flow resulting from the use
of those assets."1 In the firm where all capital originates with equity, the value of the firm is the value of the total equity in the firm. When
debt is a source of capital for the firm, the debt holders "have a priority claim on their interest and principal, and the equity holders have a residual claim on
what remains after the debt obligations are met."2 The purpose here is to assess this relationship in the financial services industry. Overview: Capital Structure and Firm Value
In most organizations, the value of the firm is equal to the total of debt, equity and available cash, before considering any of the tax
benefits associated with debt financing. Where there is preferred stock as well, that too enters into the value of the firm. The value of the interest tax shield
also is included, and can be significant. Regardless of whether the firm pays dividends to its shareholders, both the debt holder and shareholders
have legitimate claims on the business. The claim that the debt holders have against the firm is "equal to the interest payments during that period plus any principal payments
that are due."3 Debt holders hold the first hierarchical position of order in which obligations are paid. Their claims are honored first, followed by the claims of shareholders
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