14- 1 fundamentals of corporate finance sixth edition richard a. brealey stewart c. myers alan j....
TRANSCRIPT
14- 1
Fundamentals of Corporate
Finance
Sixth Edition
Richard A. Brealey
Stewart C. Myers
Alan J. Marcus
Slides by
Matthew Will
Chapter 14
McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved
Introduction to Corporate Financing
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Topics Covered
Creating Value with Financing Decisions Common Stock Preferred Stock Corporate Debt Convertible Securities Patterns of Corporate Financing
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Types of Securities Equity
Common stock Preferred stock
Debt Commercial paper Debentures Guaranteed notes Remarketable debt Euro notes Sterling notes New Zealand dollar notes Bank loans
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Common Stock
Treasury Stock
Stock that has been repurchased by the company and held in its treasury
Issued Shares
Shares that have been issued by the company.
Outstanding Shares
Shares that have been issued by the company and held by investors.
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Common StockAuthorized Share Capital
Maximum number of shares that the company is permitted to issue, as specified in the firm’s
articles of incorporation.
Par Value
Value of security shown on certificate.
Retained Earnings
Earnings not paid out as dividends.
Addiotional Paid Up CapitalDifference between issue price and par
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Common Stock
Book Value vs. Market ValueBook value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that shareholders place on those shares today. The market value of the firm is forward looking, it depends on the future dividends that shareholders expect to receive.
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Common Stock
Example - H.J. Heinz Book Value vs. Market Value (5/2007)
Total Shares outstanding = 322 million
1,843Value)(Book equity common Net
219-Other
4,406-costat sharesTreasury
5,779earnings Retained
581capitalin paid Additional
108par) ($.25 SharesCommon
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Common Stock
Example - H.J. Heinz Book Value vs. Market Value (5/2007)
Total Shares outstanding = 322 million
billion $14.812ValueMarket
322x shares of #
$46/sh= priceMarket 2007May
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Common Stock
Corporate Equity Holdings
Mutual Funds28.3%
Pension Funds22.3%
Insurance Companies
8.0%
Rest of World12.6%
Households27.1%
Other1.4%
Banks & Savings0.3%
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Preferred Stock
Preferred Stock - Stock that takes priority over common stock in regards to dividends.
Net Worth - Book value of common shareholder’s equity plus preferred stock.
Floating-Rate Preferred - Preferred stock paying dividends that vary with short term interest rates.
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Corporate Debt
Debt has the unique feature of allowing the borrowers to walk away from their obligation to pay, in exchange for the assets of the company.
“Default Risk” is the term used to describe the likelihood that a firm will walk away from its obligation, either voluntarily or involuntarily.
“Bond Ratings”are issued on debt instruments to help investors assess the default risk of a firm.
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Corporate Debt
Prime Rate - Benchmark interest rate charged by banks.
Funded Debt - Debt with more than 1 year remaining to maturity.
Sinking Fund - Fund established to retire debt before maturity.
Callable Bond - Bond that may be repurchased by firm before maturity at specified call price.
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Corporate Debt
Subordinate Debt - Debt that may be repaid in bankruptcy only after senior debt is repaid.
Secured Debt - Debt that has first claim on specified collateral in the event of default.
Investment Grade - Bonds rated Baa or above by Moody’s or BBB or above by S&P.
Junk Bond - Bond with a rating below Baa or BBB.
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Corporate Debt
Eurodollars - Dollars held on deposit in a bank outside the United States.
Eurobond - Bond that is marketed internationally.
Private Placement - Sale of securities to a limited number of investors without a public offering.
Protective Covenants - Restriction on a firm to protect bondholders.
Lease - Long-term rental agreement.
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Convertible Securities
Warrant - Right to buy shares from a company at a stipulated price before a set date.
Convertible Bond - Bond that the holder may exchange for a specified amount of another security.
Convertibles are a combined security, consisting of both a bond and a call option.
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Patterns of Corporate Financing
Firms may raise funds from external sources or plowback profits rather than distribute them to shareholders.
Should a firm elect external financing, they may choose between debt or equity sources.
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Patterns of Corporate Financing
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0
50
100
150
200
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Per
cent
of
tota
l sou
rces
New Debt
New Equity
Internal Funds
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Patterns of Corporate FinancingD
ebt R
atio
, %Debt to (Debt + Equity) Ratio for Non-Financial Firms
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Web Resources