Essay - Corporate Finance Issues in Order to Decide from Which Sources...

Corporate finance issues

***** order to decide from which sources the company should obtain the required cash for financing this project, there are a few theoretic*****l assertions that should be made. First of all, deciding the source of capital (equity, debt, preferred stock) has to ***** done according to the specific needs and characteristics ***** the project. In ***** case, Intel has to replace the defective motherboards. The project is definitely a short-term one, with ***** huge impact on the firm's credibility, so the ***** has to react swiftly. Addition*****y, ***** project ***** not cyclic.

The second issued ***** ***** to be discussed is the hierarchy of financing. There are researchers who claim that companies follow a ***** hierarchy, with retained earnings being the most ***** choice ***** financing, ********** *****ed by debt, while new equity ***** the least preferred choice. This hierarchy obviously has a r*****tionale. The first reason for which retained ***** ***** the favorite source of financing is maintaining flexibility. Managers value this characteristic, so they will generally avoid using external financing, which reduces flexibility, and try to use internal financing whenever possible. The second cause of the hierarchy is control. Issuing new equity weakens *****, since the structure ***** the company's shareholders can significantly change, while issuing debt creates bond covenants, which, in turn, lead to changes in ***** company's management technique.

According ***** a survey, this ***** looks as follows: Retained Earnings, Straight Debt, Convertible Debt, External Common Equity, ***** Preferred Stock and Convertible Preferred Stock. In Intel's particular c*****e, we should assume that any retained earnings from the previous year are ***** available, since ***** cash, short-term investments and accounts receivable are already allocated to o*****r *****s. Theref*****e, the only solution for the company to raise the ***** $675 million is to issue ***** equity or *****.

There are several fac*****rs that influence the decision of a ***** in Intel's position. A sh*****t analysis of each one of them should prove useful, as certain aspects are applicable in ***** case, ***** others *****n't. Let's concentrate first on debt. There are ***** benefits and costs associated to *****. The benefits ********** tax incentives and additional discipline ***** the management. ***** ***** incurred are related to bankruptcy risks, agency costs and losses of future flexibility.

***** Tax Benefits a company obtains ***** issuing debt are related to the fact ***** ***** interest on debt is tax deductible, while *****flows on equity (such as dividends) are not. That means that the tax rate applies to the (EBIT-Interest) value, while ***** are made available ***** after taxes have been calculated. The tax benefit each ***** is t r B. "t" is ********** tax rate, "r" is the return ***** of a *****, and "B" is the total value of ***** b*****ds. Therefore, the after-tax ***** rate of ***** is (1-t) r.

***** result is derived from the following formulae: Suppose "k" is the cost of equity (i.e., the required rate of return given ***** risk, inclusive of both