Financing costs

Financing costs are those with a finance -related costs .

Business administration

Financing is an operational function that incurs financing costs when performed. A company's financing costs are made up of the costs of using equity and the costs of drawing on outside capital . In business administration , the financing costs are also called total capital costs .

General

The total cost of capital includes the cost of equity and debt financing . The cost of self-financing consists of transaction costs for the issue or listing of shares and fictitious costs. The latter include the opportunity cost of equity of a shareholder for a lost alternative investment. The shareholders' equity costs are composed of a risk-free interest rate (opportunity interest rate for a risk-free, lost alternative investment) and a risk premium . The risk premium represents that part of the shareholder's expected return that he demands as compensation for the entrepreneurial risk in addition to the risk-free interest . Distributions , dividends or retained earnings , on the other hand, are not costs of equity, but represent a use of profit. The costs of debt financing include, in particular, interest expenses .

species

Business administration divides financing costs into quantitative and qualitative financing costs .

• quantitative financing costs:
  • one-time costs
    • Fundraising costs ( brokerage commissions for loan brokerage , commitment fees )
    • Capital procurement costs ( discount , costs of arranging loan collateral , IPO, issuing costs )
    • Amortization costs ( hedging costs , cancellation costs , costs for the draw of bonds );
  • permanent costs
    • Interest expense (interest and similar expenses, overdraft commission )
    • Market maintenance costs (course maintenance costs, costs of the general meeting );
• Qualitative financing costs are to be determined using probability calculations:
  • Risk of non-prolongation of borrowed capital (risk that creditors and the capital market are not ready to prolong )
  • Risk of loss (risk of a reduction in equity due to borrowing costs).

There is a positive correlation between the qualitative financing costs and / or increasing capital lease time and / or interest rate risk .

Financing costs and debt level

Due to the difference between the cost of equity and debt, the cost of total capital initially decreases when the cheaper debt is raised. In this context, the leverage effect means that the higher the level of debt , the better the return on equity in companies as long as the interest rate on debt is below the return on total capital . This positive leverage effect has a positive effect until the optimal level of indebtedness is reached; however, the optimal level of indebtedness is exceeded if the increase in the total cost of capital exceeds the positive effect of borrowing.

Key figures

From the perspective of financing costs, the optimal capital structure is achieved when quantitative and qualitative financing costs form a minimum. Financing costs are considered to be fixed costs , as they arise regardless of employment . In “financial leverage”, they are particularly burdensome in (external) capital-intensive companies and worsen the breakeven point when the level of employment decreases. The "financial leverage" describes the influence of the capital structure on the return on equity and expresses the sensitivity of the net profits (gross profit minus interest expense) to a change in gross profits:

${\displaystyle {\text{Financial leverage}}={\frac {{\text{Umsatzerlöse}}-{\text{variable Kosten}}-{\text{fixe Kosten}}}{{\text{Umsatzerlöse}}-{\text{variable Kosten}}-{\text{fixe Kosten}}-{\text{Zinsaufwand}}}}}$

The American financial scientist Nevins D. Baxter came to the conclusion in September 1967 that the greater the debt, the greater the risk of over-indebtedness and the greater the risk of bankruptcy . The creditors will increase their interest on borrowed capital as the level of indebtedness increases, which has a direct effect on the cost of capital and thus the "financial leverage".

The weighted average cost of capital (WACC) is an economic key figure that takes into account the cost of equity and debt and understands the company value as the sum of the market values of debt and equity:

${\displaystyle \ V=D+E}$

where represents the total enterprise value , the market value of the debt capital and the market value of the equity capital . ${\displaystyle \ V}$
${\displaystyle \ D}$
${\displaystyle \ E}$

Tax law

In tax law , financing costs incurred in connection with the income are deductible as income- related expenses within the meaning of Section 9 (1) No. 1 EStG.

The economic connection with the income is particularly relevant for the deduction. In the tax period in which to drain the financing costs, these are deductible. The discharge principle of § 11 EStG is decisive here. Expenses are above all

• Debt interest for loans (but also commitment interest, guarantee commissions, credit commissions, etc.)
• Funding costs of a loan (e.g. closing fees, costs of credit intermediaries, etc.)
• Cost of fail-safe position (eg. As notary fees for the land charges , valuation fees, etc.)
• Damnum or Disagios

With regard to the discount, it must be taken into account that this may not be claimed for tax purposes in accordance with the outflow principle, but is distributed over the term of the loan.

2-account model

In the case of income from self-employment , attempts are often made to turn private (non-deductible) debt interest into operational (deductible) financing costs. The 2-account model is used for this. Operational costs are posted to a bank account, but the income is posted as withdrawals to a private account. While the private withdrawals are used to repay private loans, the interest on the business account is financing costs and thus deductible. In order to close this tax loophole, the BMF letter of May 22, 2000 IV C 2 - S 2144–2160 / 00 was issued.

Shareholder debt financing

In order to prevent the profits of international companies in subsidiaries in countries with high tax rates from being reduced by imposing high financing costs on them by the parent company, there are complicated rules on shareholder external financing , which are to be adjusted as part of the 2008 corporate tax reform in Germany .

Tenancy law

In German tenancy law , the financing costs are not ancillary costs that can be passed on to the tenant. Only in the area of social housing are the actual financing costs taken into account in the so-called cost rent ( Section 8a WoBindG ).

See also

• Cost of capital

Individual evidence

1. ↑ Thomas Hutzschenreuter, General Business Administration , 2009, p. 156
2. ↑ Johanna Souad Qandil, Perception of the quality of the final examination , 2013, p. 57
3. ^ Hans Schneider, in: Horst-Thilo Beyer , Finanzlexikon , 1971, p. 127 f.
4. ↑ Helmut Lipfert, Decision Support for the Finance Director , in: Handelsblatt No. 234 of 4./5. December 1964, p. 25
5. ↑ Gabriele Hildmann / Jörg Fischer, Financing , 2002, p. 49
6. ↑ Johannes Frerich, Causes and Effects of the Regional Differentiation of Private Saving Activities in Industrialized Countries , 1969, p. 90
7. ^ Nevins D. Baxter, Leverage, Risk of Ruin, and the Cost of Capital , in: Journal of Finance vol. 22, September 1967, p. 395 ff.

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