Page 21 - FINAL CFA II SLIDES JUNE 2019 DAY 6
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LOS 21.c: Describe the role of debt ratings in capital READING 21: CAPITAL STRUCTURE
structure policy.
Debt ratings from ratings agencies such as Standard & Poor’s
and Moody’s reflect the creditworthiness of a company’s debt. MODULE 21.2: FACTORS AFFECTING CAPITAL STRUCTURE
LOS 21.d: Explain factors an analyst should consider in evaluating the effect of
capital structure policy on valuation.
• Capital structure changes over time,
• Capital structure of competitors with similar business risk.
• Company-specific factors (e.g., quality of corporate governance).
Analyst assess how changes in the firm’s debt ratio may reduce the WACC and then
evaluate what happens to the firm’s value if the company moves toward its optimal capital
structure.
Scenario analysis is a useful tool to determine whether management’s current capital
structure policy is maximizing the value of the firm.
LOS 21.e: Describe international differences in the use of financial leverage, factors that explain these differences, and implications of these differences for
investment analysis.
• Total debt. Companies in Japan, Italy, and France tend to have more total debt in their capital structure than firms in the US and the U.K.
• Debt maturity. Companies in North America tend to use longer maturity debt than companies in Japan.
• Emerging market differences. Companies in developed countries tend to use more total debt and use longer maturity debt than firms in
emerging markets.
