Hybrids, Expensive Debt or Cheap Equity?
Hybrids are financial instruments that combine certain elements of debt and equity. Examples are preferred equity, convertible bonds, subordinated debt and index-linked bonds. For the issuers, hybrid securities can combine the best features of both debt and equity: tax deductibility for coupon payments, reduction in the overall cost of capital, and a strengthening of senior credit ratings.
This article describes the reasons behind the increased interest among corporates in using hybrid instruments to optimize their capital structure and the impact of hybrids on the WACC and shareholder value. It also takes a look at treatment by accountants, tax regulation and rating agencies.
Creating Shareholder Value - Towards an Optimal Credit Rating
The second article in this series on WACC discusses why the credit rating should not be a goal in itself, but the result of the corporate objective to maximize value for shareholders and other stakeholders. It elaborates on managing the WACC and creating shareholder value, which is the main focus of strategic decision-making.
The article describes the relationship between the WACC, shareholder value and the existence of an optimal credit rating.
Is Estimating the WACC Like Interpreting a Piece of Art?
This seven-part series, authored by Zanders consultants, provides CFOs and corporate treasurers with a better understanding of the weighted average cost of capital (WACC), which is recognized as one of the most critical parameters in strategic decision-making. The series highlights strategies to optimize the capital structure and maximize shareholder value.
This article, the first in the series, describes how to estimate the weighted average cost of capital (WACC) and the issues that need to be considered when doing so.
If companies were entirely financed with equity, there would be little difficulty in determining its cost of capital: it would be the expected return required by shareholders. Most companies, however, are not wholly financed with equity. They tend to issue a variety of financing instruments, including debt, equity and hybrids. Due to this financing mix, companies usually calculate a weighted average cost of capital (WACC).
Zanders maintains partnerships with various suppliers of treasury management systems. One of the first partner companies with which Zanders established ties was SAP. Over the past decade Zanders built up a close relationship with this supplier of business software, a connection that is primarily characterised by mutual respect and trust.