文档介绍：Finding the Right Financing Mix: The
Capital Structure Decision
Aswath Damodaran 2
First Principles
Invest in projects that yield a return greater than the minimum
acceptable hurdle rate .
• The hurdle rate should be higher for riskier projects and reflect the
financing mix used - owners ’ funds (equity) or borrowed money (debt)
• Returns on projects should be measured based on cash flows generated
and the timing of these cash flows; they should also consider both positive
and negative side effects of these projects.
Choose a financing mix that minimizes the hurdle rate and matches the
assets being financed.
If there are not enough investments that earn the hurdle rate, return the
cash to stockholders.
• The form of returns - dividends and stock buybacks - will depend upon
the stockholders ’ characteristics.
Objective: Maximize the Value of the Firm
Aswath Damodaran 3
The Choices in Financing
There are only two ways in which a business can make money.
• The first is debt. The essence of debt is that you promise to make fixed
payments in the future (interest payments and repaying principal). If you
fail to make those payments, you lose control of your business.
• The other is equity. With equity, you do get whatever cash flows are left
over after you have made debt payments.
The equity can take different forms:
• For very small businesses: it can be owners investing their savings
• For slightly larger businesses: it can be venture capital
• For publicly traded firms: it mon stock
The debt can also take different forms
• For private businesses: it is usually bank loans
• For publicly traded firms: it can take the form of bonds
Aswath Damodaran 4
The Financing Mix Question
In deciding to raise financing for a business, is there an optimal mix of
debt and equity?
• If yes, what is the trade off that lets us determine this optimal mix?
• If not, why not?
Aswath Damodaran 5
Measuring a f