Corporate Finances

Paper Summary:

This paper uses a fictional scenario to demonstrate how a company, in this case, Intel, should decide from which sources it should obtain the required cash for financing a project. The paper uses Intel's financial statements from 1999 in order to point out the method for determining the relation between new debt and new equity and concludes that the $675 million dollars should be divided into two parts; the company should issue bonds for half the amount and new stock for the other half.

From the Paper:

"The second issued that needs to be discussed is the hierarchy of financing. There are researchers who claim that companies follow a financing hierarchy, with retained earnings being the most preferred choice for financing, then followed by debt, while new equity is the least preferred choice. This hierarchy obviously has a rationale. The first reason for which retained earnings are the favorite source of financing is maintaining flexibility. Managers value this characteristic, so they will generally avoid using external financing, which reduces flexibility, and try to use internal financing whenever possible. The second cause of the hierarchy is control. Issuing new equity weakens control, since the structure of the company's shareholders can significantly change, while issuing debt creates bond covenants, which, in turn, lead to changes in the company's management technique."

More papers on Corporate Finances:

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• Term Paper # 4797 : "Game Theory Applied to Corporate Finance"

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