Global Investments and Mergers
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Which of the two long-term financing securities (debt or equity) would
potentially maximize shareholder earnings more?
How do corporation evaluate global investment and financing alternatives?
Discussion the various reasons why mergers may lead to value creation through synergism
Discuss ways in which managers can benefit from a merger.
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Solution Summary
Which of the two long-term financing securities (debt or equity) would potentially maximize shareholder earnings more?
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Which of the two long-term financing securities (debt or equity) would
potentially maximize shareholder earnings more?
Usually, there is neither 100% nor 100% equity for long term financing by companies and there is an optimum combination of both these sources of financing which a company should maintain in order to maximize shareholder's value. The combination depends on a host of factors such as stage of the growth of the firm (startup, mature, etc.), cost of obtaining debt, Return on investments, future growth and revenue projections, etc.
Investments into companies usually require both debt and equity. The optimal ratio needs to be carefully determined for each individual situation. It is unlikely that this ratio will consist of 100% equity. If the long-term prospects are so poor that a company can never make sufficient profits to benefit from leverage then the opportunity is probably not worth pursuing. Conversely, relying on 100% debt financing often places a heavy cash drain on companies and leads to sub-optimal growth.
Debt and equity financing should not be seen as substitutes for each other. Instead, they are very different in nature and complement each other. Debt needs to be repaid in cash. Equity needs to be rewarded with long-term profits. Depending on individual circumstances and opportunities the trick for each investment is to find ...
Education
- BCom, SGTB Khalsa College, University of Delhi
- MBA, Rochester Institute of Technology
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