Corporate Debt Capacity : A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity

, by Donaldson, Gordon; Fox, Bertrand

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ISBN: 9781587980343 | 1587980347
Cover: Paperback
Copyright: 7/1/2000

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Part One. A Field Study of Corporate Debt and Related Financial Policies

Introduction

(24)

The Scope and Objectives of the Study

The Concept of Risk

The Form of Debt

The Field Research

The Characteristics of the Field Sample: The Industries; The Companies

The Organization of the Study

Background: A Review of Twenty Years of Funds Flows

(24)

The Need for Funds: Scope and Definition; Determining the Amount Required

A Classification of Patterns of Fund Requirements

The Sources of Funds: Current Internal Generation of Funds; Liquid Reserves; External Sources of Funds

Background: Basic Management Attitudes to External Sources of Funds Other Than Debt

(17)

General Attitudes Toward the Use of External Sources of Funds

Attitudes Toward Specific External Sources Other Than Debt: Common Stock; Preferred Stock

Summary Statement

Management Attitudes Concerning the Use of Long-Term Debt

(25)

The Incentive to Borrow

The Argument Against Borrowing

The Basic Problem of Uncertainty

How Management Looks at Uncertainty (Risk)

Corporate Debt Policy and the Control of Risk

(30)

Restraints on the Amount of Debt

Decision Rule No. 1 --- No Long-Term Debt Under Any Circumstances

Decision Rule No. 2 --- Borrow the Maximum Available

Decision Rule No. 3 --- Borrow the Maximum Available ``At the Prime Rate''

Decision Rule No. 4 --- Borrow the Maximum Consistent with an ``A'' Rating

Decision Rule No. 5 --- Limit the Principal Amount of (Long-Term) Debt to ``X'' Percent of Total Capitalization

Decision Rule No. 6 --- A Minimum Earnings Coverage Standard

Decision Rule No. 7 --- The Single-Project Approach to Debt

Decision Rule No. 8 --- The Rapid Payback Approach to Debt

The Control of Risk Other Than by Limiting the Amount of the Debt

The Origin of Standards of Debt Capacity: The Capital Structure of Other Companies; The Standards of the Lender; The Independent Standard

Part Two. The Analysis of Corporate Debt Capacity: An Appraisal of Practice And A Proposal For Improvement

An Appraisal of Corporate Practice in the Use of Long-Term Debt

123

(33)

Introduction

The Appropriateness of Conventional Sources from Which Debt Capacity Criteria Are Derived: The Purely Subjective Debt Criterion; The Evidence of General Industry Practice; The Risk Standard of the Lender; The Criterion of Past Experience

The Concept of Continuous Versus Discontinuous Borrowing

The Fragmented Approach to Risk Appraisal

The Validity of the Single Corporate Debt Limit

The Quantitative Form of Debt Capacity Standards: The Balance Sheet Standard --- Percent of Capitalization; The Income Statement Standard --- Earnings Coverage

A Cash Flow Analysis for the Appraisal of Risk and the Determination of Long-Term Debt Capacity

156

(37)

Introduction

The Objectives of a Cash Flow Analysis

Cash Flows and the Event of Cash Insolvency

The Determinants of Cash Flow: The Underlying Causes of Change in Net Cash Flow

The Recession Behavior of Individual Determinants of Cash Flow

A Comprehensive Method of Risk Analysis

An Analysis of the Adverse Limits of Net Cash Flows: Deriving Data on the Chance of Cash Insolvency; Evaluating Adverse Limits --- Maximum Adverse Versus Most Probable Limits

Assembling the Data on Recession Cash Balances

Summary

The Application of a Recession Cash Flow Analysis to the Debt-Equity Choice and Its Integration with Other Long-Term Policies

193

(30)

Introduction

An Example of Recession Cash Flow Analysis

Interpreting the Data on Adverse Limits of Recession Cash Balances

Cash Inadequacy Versus Cash Insolvency

The Determination of Specific Debt Limits

The Influence of Management Action on the Risk of Cash Insolvency

The Broader Implications of the Cash Flow Analysis

The Relation of Debt Capacity Rules to General Corporate Liquidity

Summary and Comment

A Review of the Debt Policies of Five Companies in the Light of Their Simulated Recession Cash Flows

223

(62)

Introduction

Company ``A'' (The Rubber Industry)

Company ``B'' (The Baking Industry)

Company ``C'' (Chemicals)

Company ``D'' (Ethical Drugs)

Company ``E'' (Machine Tools)

Summary and Conclusions

Appendices

A. Company-by-Company Record of the Means by Which Funds Were Provided in Years When Total Funds Applied Exceeded Internally Generated Funds Plus Funds Released from Other Assets

268

(6)

B. A Probability Approach to the Evaluation of Corporate Debt Capacity

274

(11)

Selected Readings Related to the Subject of Corporate Debt Capacity

285

(4)

Index

289

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Corporate Debt Capacity : A Study of Corporate Debt Policy and the Determination of Corporate Debt Capacity

Table of Contents

Supplemental Materials