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Essay / Research Paper Abstract
A 4 page paper. Taxation reduces cash regardless of when it is paid, but the organization has the ability to minimize the total amount due, thereby retaining additional earnings that can be reinvested in the business or distributed to shareholders. The ability to alter tax bills legitimately rests in capital structure. Bibliography lists 3 sources.
Page Count:
4 pages (~225 words per page)
File: CC6_KSfinTaxStck.rtf
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Unformatted sample text from the term paper:
Taxation reduces cash regardless of when it is paid, but the organization has the ability to minimize the total amount due, thereby retaining additional earnings that can be reinvested
in the business or distributed to shareholders. The ability to alter tax bills legitimately rests in capital structure. 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" (Corporate
Finance, n.d.). 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 -
first preferred, then common. The claim that shareholders maintain is that which can be fulfilled by the combination of free cash flow during a period and cash created "by
the interest tax shield, minus the claims of the debt holders" (Corporate Finance, n.d.). The debt to equity ratio (D/E) provides of view
of the portion of the firms value currently supplied by debt. The debt proportion of the firms capital structure also may be reported as debt to value, which is
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