DEBT AND DIVIDEND

Debt and Dividend

Introduction

The Debt of the Company and Its Impact on the Value

When a company has debt, what impact does it in value? It is not a simple matter. Employers found to believe that debt should subtracted from the price, as a rule, but without knowing exactly. There are also financial experts who claimed that the debt had to add it to the price. That is, positions totally opposed on the same concept. No wonder, then, the treatment of debt is often the cause of disagreement party to many transactions of sale or merger companies.

First, specify what kind of debt we are talking about, and second, whether debt must be added to the value calculated according to our "magic formula" (V = B / R, the value equals the estimated annual average benefit, divided by the expected return on investment), or must be reduced or neither one nor the other. First we must clarify what we are talking about debt. On the liabilities of a company there, simplifying matters for the purposes here we are concerned, four main concepts, which, habitual ordered by their usual degree of enforceability and maturation, lowest to highest, are: 1. Capital and Reserves, what we mean by equity, or “Equity” that which corresponds directly to shareholders. 2. Long-term financing in the form of bank loans, or securities or debentures subscribed by investors in capital market, the interest paid, and have expiration of more than 1 year. 3. Short-term financing in the form of working capital loans, a time usually less than a year, usually linked (discount financing effects, for example). 4 Trade creditors have the result of normal trading terms payment, usually without a financial cost (at least explicit). It is what is being called the "Spontaneous Liabilities." But when it comes to seeing the relationship between debt and value (or price) of a company, not the short-term debt to which it refers, but in any case, the Long-Term Debt or debt "Permanent(Bell, Rousseau, 2001pp 153)."

Long Term Debt is that which, somehow, replacement of the capital is. That to the company, i.e. Shareholders, resort, as an alternative to the contribution by shareholders own more capital. Use more long-term debt, less capital is taking advantage of what technically known as the "leverage effect." Its advantages are obvious if shareholders can get this funding to lower cost to the yield obtained from the investments made with those funds. This is what is called "positive leverage effect." The short-term debt is not called into question, because it assumes that fit the normal funding of working capital of the company. Today All company must finance the difference between their capital needs (Current Assets-Liabilities Spontaneous) and (Capital + Reserves + availability of working capital (Capital + Reserves + Long-Term Financing - Net Fixed Assets). Such funding is usually flexible Bank short term, adapting flexibly to everyday needs through commercial lines.

Debt and Value

Long Term Debt (hereinafter, "Debt"), has, as we have said, a ...