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FINANCIAL ANALYSIS: TOOLS AND TECHNIQUES CHAPTER 10

CHAPTER 10 ANALYSIS OF FINANCING CHOICES.Let’s now turn to analyzing the third aspect of the three-part decisional systems context introduced in Chapter 2: investment, operations, and financing. We’ll concentrate on the choices available in arranging a company’s long-term financing, while setting aside the incremental operational funds sources used routinely by companies in line with practices in a particular industry or service | hel7834 0_ch10.qxd 9 27 01 11 30 AM Pagy- - 25 CHAPTER 10 ANALYSIS OF FINANCING CHOICES Let s now turn to analyzing the third aspect of the three-part decisional systems context introduced in Chapter 2 investment operations and financing. We ll concentrate on the choices available in arranging a company s long-term financing while setting aside the incremental operational funds sources used routinely by companies in line with practices in a particular industry or service and broadly discussed in Chapter 3. We choose this focus because as we observed earlier the nature and pattern of long-term funding sources is intricately connected with the types of business investments made and is critical to the growth stability or decline of operations. Indeed management must fund its strategic business design with an appropriate mix of capital sources that will assist in bringing about the desired increase in shareholder value. This chapter will deal with the key considerations in assessing the basic financing options open to management. While the choice among long-term debt preferred and common equity is blurred by a bewildering array of modifications and specialized instruments in each category we ll discuss only the main characteristics of the three basic types of securities. Because our emphasis is on quantitative analysis we must keep in mind that many other considerations enter into these choices. For example the specific type of business and the industry in which it operates will affect the long-term capital structure chosen at various stages of a company s development as will the preferences and experiences of senior management and the board of directors. These aspects cannot be adequately covered within the scope of this book. We ll begin with a broad framework for analysis that defines the key areas to be analyzed and weighed in choosing sources of long-term financing. Next we ll look at the techniques of calculating the impact on a company s financial performance .