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on Corporate Finance |
| By: | Stephan Schaeffler (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen) |
| Abstract: | With the introduction of incentive regulation in many network industries, different approaches how to remunerate invested capital have been used. Under incentive regulation, many regula-tors remunerate the regulated asset base with a weighted average cost of capital (WACC) based on a pre-defined gearing, not considering individual capital structure at all. From a reg-ulator’s point of view, the aim is clear: Provide incentives to the firms to optimize their capital structure, i.e. finding the right balance between equity financing and debt. Taggert (1981) shows that rate-of-return regulation creates an incentive for regulated firms to alter their capi-tal structures in order to influence consumer prices. Spiegel and Spulber (1994) find that the firm chooses its equity and debt in order to affect the outcome of the regulatory process. As a hybrid model between WACC and individual capital structure, the German Regulator sets incentives for a certain capital structure by limiting the return on equity that can be incorpo-rated into network tariffs with a cap. However it has not been analyzed neither in theoretical nor in practical research which incentives are really created by this cap. To analyze the impact of different capital structure regulation mechanisms on the optimal capital structure, a static trade-off-theory model of capital structure is presented and the char-acteristics of several different approaches to capital structure regulation and their characteris-tics are analyzed. The results indicate that the overall effect of capital structure regulation is very important: In an ex-ante regulation setting, the consideration of individual capital struc-tures leads to higher equity ratios than the use of a benchmark-WACC. In this context, caps are an effective mean to set incentives for a predefined equity ratio. In an ex-post regulation where bankruptcy is merely a threat, it may be optimal to rely on extreme strategies solely financing with equity or debt. |
| Keywords: | Capital structure, trade-off theory, network operators, regulation, cost of equity |
| JEL: | G32 G38 L9 |
| Date: | 2012–04 |
| URL: | http://d.repec.org/n?u=RePEc:dui:wpaper:0212&r=cfn |
| By: | Fernandez, Pablo (IESE Business School) |
| Abstract: | This paper addresses 10 corporate finance topics that are not well treated (or not treated at all) in many Corporate Finance Books. The topics are: 1. Where does the WACC equation come from? 2. The WACC is not a cost. 3. What is the WACC equation when the value of the debt is not equal to its nominal value? 4. The term equity premium is used to designate four different concepts. 5. Textbooks differ a lot on their recommendations regarding the equity premium. 6. Which Equity Premium is used by professors, analysts and practitioners? 7. Calculated (historical) betas change dramatically from one day to the next. 8. Why do many professors still use calculated (historical) betas in class? 9. EVA does not measure Shareholder value creation. 10. The relationship between the WACC and the value of the tax shields (VTS) |
| Keywords: | equity premium; value tax shields; required return to equity; WACC; |
| JEL: | G12 G31 M21 |
| Date: | 2012–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0954&r=cfn |
| By: | Sandra Leitner; Robert Stehrer (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | In 2009, Latin America was sucked into the financial crisis which, following the bankruptcy of Lehman Brothers, echoed around the globe and shook and shocked the entire global financial system. As a consequence, Latin America experienced a slump in real GDP growth, a drop in exports and a collapse in inward FDI flows. Against that backdrop, the paper sheds light on the effects the global financial crisis had on firms’ access to financing as well as on their funding strategies of investment projects. The analysis uses data collected as part of the World Bank Enterprise Survey (WBES) component of the Latin American and Caribbean (LAC) Enterprise Surveys 2006 and 2010 and demonstrates that during the crisis, the availability of internal capital markets played a pivotal role for larger and foreign firms or firms that were part of a larger firm; in contrast, no evidence is found that state-owned firms enjoyed preferential treatment or special budgetary support. In addition, it shows that in the face of the crisis, entrepreneurs adapted their funding strategies firms whose access to financing deteriorated, more intensely relied on bank and supply-chain-financing, foreign firms or firms that were part of a group more strongly availed of internal funds, while firms that both export and import more intensely drew on bank credits to fund their investment projects. |
| Keywords: | financial crisis, access to financing, capital structure, firm level, Latin America |
| JEL: | G01 G11 D22 L16 |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:78&r=cfn |