FRICTO Analysis
Six Elements that are Relevant for Financing Decisions
(Topic: Financial Leverage/Capital Structure)
Flexibility: Does increasing debt restrict the firm for seeking more debt in
the future due to high debt levels? Does increasing debt violate loan
covenants or result in the potential for loan covenants to be violated with
poor performance?
Risk (financial): Can the company meet debt service (interest and principal)
especially when times are tough? How volatile are the company’s earnings
and cash flow?
Income: How do the different financing alternatives impact earnings per
share (EPS) and return on equity (ROE)?
Control: Does issuing equity affect the ownership control of the company?
Timing: Are the capital markets (debt and equity markets) “friendly”? Are
interest rates high? Low? Which direction are interest rates headed? Based
on the stock price, is this a good time to issue stock? When will the
capital or funds be needed?
Other: What is the attitude of management and shareholders toward debt? How
will the company’s bond rating be affected?
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