Session 21: Debt Design and Dividend Basics

In this class, we looked at the design principles for debt. In particular, we noted the allure of matching up debt cash flows to asset cash flows: it reduces default risk and increases debt capacity. We then looked at the process of designing the perfect debt for your company, starting with the assets you have, checking to see if you still get your tax deduction, keeping different interest groups happy and sugarcoating the bond enough to make it palatable to bond holders. We then went through three basic approaches to debt design: an intuitive assessment of a company's products and pricing power, an analysis of expected cash flows on a single project and a macro economic regression of firm value/operating income against interest rates, GDP, inflation and exchange rates. In the second half of the class, we started on our discussion of dividend policy. We began by looking at some facts about dividends: they are sticky, follow earnings, are affected by tax laws, vary across countries and are increasingly being supplanted by buybacks at least in the United States. We will continue the discussion of how much companies should return to investors in the next session. In the meantime, if you are interested in what dividend policy around the world looks like, try this post of mine from earlier this year:http://aswathdamodaran.blogspot.com/2017/02/january-2017-data-update-9-dividends.html Slides: http://www.stern.nyu.edu/~adamodar/podcasts/cfspr17/session21.pdfPost class test: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session21test.pdfPost class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session21soln.pdf