chapter  5
45 Pages

International financial management

There are two ways of financing your firm: by contracting debt (business loans) or issuing equity (shares). Creditors have senior debt that must be paid or satisfied, except in the case of bankruptcy. They only share in bankruptcy risk. Shareholders participate in ownership of the firm, so they share in business risk and risk of bankruptcy, in which case they usually get nothing. Due to the greater risk, shareholders typically require a higher rate of return to their equity. Interest payments to creditors are treated as an expense, so they are a “tax shield” for the firm.