2. How Credit Ratings Affect the Capital Structure of a Firm
2. How credit ratings affect the capital structure of a firm
Credit ratings is the assessment of the credit worthiness of a firm based on historyof borrowing and repayment. Credit rating is the credit worthiness of a debtor. The debtors ability to pay back the debt.
Companies with high rating (AAA) have a good market reputation and logically would avoid not being in favor of more debt in capital structure to save them from any adverse circumstances. High credit ratings expose a firm to obtain higher external sources of finance
Medium rated firms have access to cheaper debt financing than the highly rated firms.
A firm can establish a reputation over time as a sound borrower by repaying debt in a timely manner. That reputation is conveyed by rating agencies, which use both public and private information to form opinions about borrowers’ payment history and their expected ability to repay debt .
An increase (decrease) in a firm’s credit rating affects that firm’s ability to borrow by lowering (raising) its cost of debt. If a firm’s cost of debt is too high, that firm might pass up positive net-present-value opportunities. Since the value of a firm equals the sum of assets in place and the present value of growth opportunities a firm’s ability to borrow impacts its value.
Credit rating is always the most prevailing and significant measurement for corporate debt s default risk. The conception of single bankruptcy triggering threshold is the core of pricing theory for corporate debt and hence the capital
Credit ratings is the assessment of the credit worthiness of a firm based on historyof borrowing and repayment. Credit rating is the credit worthiness of a debtor. The debtors ability to pay back the debt.
Companies with high rating (AAA) have a good market reputation and logically would avoid not being in favor of more debt in capital structure to save them from any adverse circumstances. High credit ratings expose a firm to obtain higher external sources of finance
Medium rated firms have access to cheaper debt financing than the highly rated firms.
A firm can establish a reputation over time as a sound borrower by repaying debt in a timely manner. That reputation is conveyed by rating agencies, which use both public and private information to form opinions about borrowers’ payment history and their expected ability to repay debt .
An increase (decrease) in a firm’s credit rating affects that firm’s ability to borrow by lowering (raising) its cost of debt. If a firm’s cost of debt is too high, that firm might pass up positive net-present-value opportunities. Since the value of a firm equals the sum of assets in place and the present value of growth opportunities a firm’s ability to borrow impacts its value.
Credit rating is always the most prevailing and significant measurement for corporate debt s default risk. The conception of single bankruptcy triggering threshold is the core of pricing theory for corporate debt and hence the capital