An acronym for flexibility (F), risk (R), income (I), control (C), timing (T), and other (O). These represent important factors that affect the debt-equity mix decision in a company.
- flexibility- the impact of alternative financing choices on the company’s ability to raise funds in the future. A company that has flexibility will always have access to financial markets and can also take the financing type of its liking.
- risk- the impact of alternative financing choices on the risks the company and its stakeholders are exposed to. As a rule-of-thumb, taking on more debt increases the risks of both creditors and shareholders.
- income- the impact of alternative financing choices on the company’s income. A company whose EBIT is above its financing indifference point will be able to increase its earnings per share (EPS) by taking on additional debt.
- control- the impact of alternative financing choices on the amount of control over the company held by each shareholder. In general, issuing additional common shares will dilute this control.
- timing- the impact of market conditions on alternative financing choices. From time to time, financial markets shift from one preferred type of financing to another, thereby affecting companies’ debt-equity mix choices.
- other- the impact of alternative financing choices on other issues, or the impact of such issues on these choices. For example, the potential reduction in the cost and risks of debt financing that would be brought about by posting collateral.
Comments