Company Finance Structure

Paper Summary:

This paper examines various sources of funding and the risks and benefits provided by each source as a company looks to survive and achieve desired levels of profitability. The paper then presents a case study that demonstrates how British Telecommunications (BT), a European communications giant, learned that straying from the pecking order financial model can damage a company's credibility, profitability and standing with investors. BT's experiences show quite clearly how financial decisions can play a critical role in a company's survival and profitability.

Overview:
Pecking Order Examined
BT: A Case Study
Conclusion

From the Paper:

"In instances where funding company operations completely from retained earnings is not feasible, debt financing often is used. Companies borrow money from banks or other lending institutions in exchange for a promise to repay the amount, with interest, over a period of time. Debt financing provides a convenient source of funding to cover expenses or pursue growth initiatives - plus the debt is tax deductible -- but it can provide significant risks to a company's profitability and viability (Goedhart and Koller, 2006). Because of the interest involved with bank debt, companies repay an amount that can be significantly higher than what they borrowed.
When a company borrows too much money, investors will naturally wonder whether the company has the ability to repay it and why the company can not fund more operations from existing revenue."

Sample of Sources Used:

• Brigham, Eugene F., Louis C. Gapenski, & Michael C. Ehrhardt (1998). Financial management: Theory and practice, 9th Edition, Orlando, Florida, USA: Harcourt.
• Fairchild, Richard (2003). "An investigation of the determinants of BT's debt levels from 1998-2002: What does it tell us about the optimal capital structure?" Retrieved Oct. 16, 2006 from http://www.bath.ac.uk/management/research/pdf/2003-03.pdf#search='british%20telecomcapital%20structure.
• Goedhart, Marc and Koller, Tim (2006). "Making Capital Structure Support Strategy." Retrieved Oct. 16, 2006 from the CFO magazine Web site at http://www.cfo.com/article.cfm/5622276/4/c_2984411?f=home_featured.
• Liesz, Thomas (2001). "Why pecking order theory should be included in introductory finance courses", Mountain Plains Journal of Business and Economics, Vol. 2, Retrieved Oct. 16, 2006 from http://www.mountainplains.org/articles/2001/pedagogy/PECKING%20ORDER%20THEORY.htm.
• Rosenbush, Steve (2006). "Fresh barbarians at the gates?" Business Week Europe, 14 June, Retrieved Oct. 16, 2006 from http://uk.biz.yahoo.com/14062006/244/fresh-barbarians-gates.html.

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