Capital Structure Decisions: Evaluating Risk and Uncertainty

Chapter One

The CFO’s Role in the New Global Economy

CAPITAL STRUCTURE DECISIONS ARE the central force determining the orientation of decisions that are capable of meeting several conflicting goals and priority structures that ever-demanding stakeholders place before a chief financial officer (CFO). Traditionally, most corporate finance books suggest a limited and isolated role for a CFO. A decision maker is not confined to making only range-bound decisions, governed by the economic costs and benefits associated with those decisions. Unlike a computer’s simulation program that generates optimal solutions to input cost and risk, a decision maker evaluates several qualitative aspects of a decision with a 360-degree approach to the organisation’s problem. CFOs face challenging environments that are not limited to the financial target values represented in annual reports. They extend beyond the expected financial goals of return on investment (ROE) and price-earnings ratio (P/E). CFOs’ actions need to meet the expectations of several stakeholders who communicate with the firm on a daily basis. Besides the natural stakeholders, such as shareholders, the government, creditors, debtors, and others, there may be several invisible stakeholders, such as the taxing authorities, victims of corporate tragedies like the Bhopal gas tragedy, or political boilovers such as the Tata Sindhur case. Each stakeholder has his own set of expectations for the company. Each expectation is translated into ...