Corporate Finance


FINANCE dalam sudut pandang teori bukan merupakan konsep, model dan tesis yang diterima begitu saja. Perdebatan untuk menemukan FINANCE yang lebih kuat, terjadi dalam semua topik. Perdebatan itu sampai sekarang terus berkembang, bahkan untuk teori finance yang sudah mapan seperti teori nilai intrinsik yang menghasilkan model “value of money” – sebagai contoh. Perdebatan berkelanjutan yang belum diketahui ujungnya di masa yang akan datang. Namun, bukan berarti tidak ada teori yang telah menjadi konvensi. Berbagai teori konvensional, meski tetap juga terus diperdebatkan sepanjang waktu, dapat dirangkum sekurang-kurangnya sebagai berikut:

  1. Intrinsic Value Theory
  2. Portfolio Theory
  3. Asset Pricing Theory
  4. Option Pricing Theory
  5. Agency Theory
  6. Signaling Theory
  7. Pecking Order Theory

Valuation Theory

Portfolio Theory

Asset Pricing Theory

Option Pricing Theory

Agency Theory

Signaling Theory

Signal is a message credibly conveying information from informed to uninformed players. It is credible if:
  • it is in the player’s interest to tell the truth
  • it is too costly to mimic (to lie) by other

Assumptions:

  • –Managers have better information about a firm’s long-run value than outside investors
  • –Managers act in the best interests of current stockholders
  • Managers can be expected to:
    • Issue stock if they think stock is overvalued
    • Issue debt if they think stock is undervalued
    • As a result, investors view a common stock offering as a negative signal — managers think stock is overvalued
Signaling theory, suggests firms should use less debt than MM suggest
This unused debt capacity helps avoid stock sales, which depress P0 because of signaling effects

Signaling Prospects Through Financing Decisions

One of the key assumptions Modigliani and Miller make in their work is that market information is symmetric, meaning companies and investors have the same information with respect to the company’s future projects/investments. This assumption, however, is not realistic. When making capital decisions, a company’s management should have more information than an investor, which implies asymmetric information.
A financing decision is a way in which a company can inadvertently signal its prospects to investors. For example, suppose Newco decides to finance a new project with equity. Newco’s additional equity would in fact dilute stockholder value. Since companies typically try to maximize stockholder value, would an equity offering be a bad signal? The answer is yes.
There would be some benefit from the project to the stockholders; however, the dilution from the offering would offset some of that benefit. If a company’s prospects are good, management will finance new projects with other means, such as debt, to avoid giving any negative signals to the market.

Pecking Order Theory

—Theory stating that firms prefer to issue debt rather than equity if internal finance is insufficient
—Rule 1: Use internal financing first
—Rule 2: Issue debt next, equity last
—According to the pecking-order theory:
  • —There is no target D/E ratio
  • —Profitable firms use less debt (they use self-financing instead)
  • —Companies like financial slack
—The pecking order theory  suggests that there is an order of preference for the firm of capital sources when funding is needed.
—
—The firm will seek to satisfy funding needs in the following order:
  1. —Internal funds
  2. —External funds
    1. —Debt
    2. —Equity
—There are three factors that the pecking order theory is based on and that must be considered by firms when raising capital.
  1. —Internal funds are cheapest to use (no issuance costs) and require no private information release.
  2. Debt financing is cheaper than equity financing.
  3. Managers tend to know more about the future performance of the firm than lenders and investors. Because of this asymmetric information,  investors may make inferences about the value of the firm based on the external source of capital the firm chooses to raise.
  • —Equity financing inference – firm is currently overvalued
  • —Debt financing inference – firm is correctly or undervalued
  • The pecking order theory suggests that the firm will first use internal funds. More profitable companies will therefore have less use of external sources of capital and may have lower debt-equity ratios.
  • If internal funds are exhausted, then the firm will issue debt until it has reached its debt capacity .
  • Only at this point will firms issue new equity.
  • This theory also suggests that there is no target debt-equity mix for a firm.

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