Notes of a second year student studying Bachelors of Accounting at the University of the Free State. With this notes that i have compiled, i was able to proudly say that i received a distinction in Financial Management by using this notes. If you are struggling with Financial Management use this no...
Debt Equity
Types of financing
Long term financing (5 years or longer) Ordinary shares
Bonds Higher risk and thus higher return
Debentures Used in WACC
Loan Preference shares
Lower risk than ordinary shares
Medium term financing (between 1 and 5 WHY?
years) - Fixed % dividend
→ Overdraft - Preference @ liquidation
→ Leases
→ Sale and leaseback
Short term financing (less than a year)
Working capital management
Balance between these two
Capital structure = % debt and % equity
Point where WACC is lowest according to traditional
theory of gearing
Debt – cheaper – get more debt and decrease WACC up to a certain point; higher return for
shareholders
Too much debt – more interest – higher WACC and lower return
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