Welcome to The Presentation

Corporate Debt Policy

Debt Financing
Debt is borrowing money from an outside source with the
promise to return the principal, in addition to an agreed-
upon level of interest.
In finance, debt is also referred to as leverage.
The most popular source for debt financing is the bank,
but debt can also be issued by a private company or even
a friend or family member.
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Pros & Cons
Maintain ownership
Tax deductions
Lower interest rate

Repayment obligation
High rates
Impacts credit rating
Cash and collateral
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Alternatives to Debt
Financing
Equity financing: This involves selling shares of your
company to interested investors, or putting your own
money into the company.

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Debt Vs. Equity : Which
is best?
Most businesses choose for a blend of both equity and
debt financing to meet their needs when expanding a
business.
The two forms of financing together can work well to
reduce the downsides of each.
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MM Theorem on Corporate
Capital Structure
The study of a companys optimal capital structure dates
back to 1958 when Franco Modigliani and Merton Miller
published their Nobel Prize winning work The Cost of
Capital, Corporation Finance, and the Theory of
Investment.
under conditions where corporate income taxes and
distress costs are not present in the business environment,
the use of financial leverage has no effect on the value of
the company.
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Continue.
Modigliani and Miller expanded their Irrelevance
Proposition theorem to include the impact of corporate
income taxes, and the potential impact of distress cost, for
purposes of determining the optimal capital structure for a
company.
Their revised work, universally known as the Trade-off
Theory of capital structure, makes the case that a
companys optimal capital structure should be the prudent
balance between the tax benefits that are associated with
the use of debt capital, and the costs associated with the
potential for bankruptcy for the company.
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Assumption 01

















ROE of a Company with 100% financing with equity

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Assumption 02








ROE of a Company with 50/50 financing structure of debt and equity.
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Assumptions Result







financial leverage can be used to make the performance of a
company look dramatically better than what can be achieved
by solely relying on the use of equity capital financing.

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Real
Company Name Debt Equity
Ratio 2013
(Times)
Debt Equity
Ratio 2012
(Times)
ROE 2013
(%)
ROE 2012
(%)
British American Tobacco
Bangladesh Company Ltd.
0 (Zero) 0 (Zero) 54.69 56.05
BSRM Steels Ltd. 2.14 2.81 18.64 15.62
Square Textiles Limited 0.40 0.48 12.51 13.71

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Bottom Line
Corporate management utilizes financial leverage (Funding
with Debt) primarily to increase the companys earnings per
share and to increase its return-on-equity.
With these advantages come increased earnings variability and
the potential for an increase in the cost of financial distress,
perhaps even bankruptcy.
The management of a company should take into account the
business risk of the company, the companys tax position, the
financial flexibility of the companys capital structure.
The right ratio will vary according to type of business, cash
flow, profits and the amount of money you need to expand
your business.

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