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1、LEARNINGOBJECTIVESAfterstudyingthischapter,youshouldunderstand:LO1TheeffectoffinancialFINANCIALleverage.LO2TheimpactoftaxesandbankruptcyoncapitalLEVERAGEstructurechoice.16LO3TheessentialsoftheANDCAPITALbankruptcyprocess.STRUCTUREPOLICYWHATDOPHARMACEUTICALCOMPANYplanstoissuenewdebttobuybackabout$10b
2、illionGlaxoSmithKlinePLCandsatellitetelevisionproviderofitsstock.Ratingagenciesfrownedontheidea:FitchDirecTVhaveincommon?Theansweristhat,indowngradedTarget’sdebt,andMoody’sputthecom-May2008,bothcompaniesannouncedbondissues.pany’sdebtonwatchforapotentialdowngrade.WhilepartofGlaxoSmithKline’s$9billi
3、onbondofferingSowhywouldcompanieslikeGlaxoSmithKlineandwasforgeneralcorporatepurposes,muchofitwastoDirecTVevenconsiderborrowingmoneytorepur-beusedtobuybackthecompany’sstock.InDirecTV’schasetheirownstock?AndwhywouldTargetdosocase,alloftheproceedsfromits$2.5billionissuewereattheexpenseofacreditratin
4、gdowngrade?Totobeusedtobuybackstock.Ofcourse,thesetwoanswerthesequestions,thischaptercoversthebasiccompanieswerenotaloneinalteringtheirbalanceideasunderlyingoptimaldebtpoliciesandhowfirmssheets.InNovember2007,retailerTargetannouncedestablishthem.Mastertheabilitytosolveproblemsinthischapterbyusingas
5、preadsheet.AccessExcelMasteronthestudentWebsitewww.mhhe.com/rwj.Thusfar,wehavetakenthefirm’scapitalstructureasgiven.Debt–equityratiosdon’tjustdroponfirmsfromthesky,ofcourse,sonowit’stimetowonderwheretheycomefrom.GoingbacktoChapter1,recallthatwerefertodecisionsaboutafirm’sdebt–equityratioascapitalstru
6、cturedecisions.1Forthemostpart,afirmcanchooseanycapitalstructureitwants.Ifmanagementsodesired,afirmcouldissuesomebondsandusetheproceedstobuybacksomestock,therebyincreasingthedebt–equityratio.Alternatively,itcouldissuestockandusethemoneytopayoffsomedebt,therebyreducingthedebt–equityratio.Activitiessu
7、chasthese,whichalterthefirm’sexistingcapitalstructure,arecalledcapitalrestructurings.Ingeneral,suchrestructuringstakeplacewheneverthefirmsubstitutesonecapitalstructureforanotherwhileleavingthefirm’sassetsunchanged.C
