An Overview of Corporate Financing Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 14 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Topics Covered Patterns of Corporate Financing Common Stock Preferred Stock Debt Derivatives
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders. Should a firm elect external financing, they may choose between debt or equity sources. Patterns of Corporate Financing
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Patterns of Corporate Financing
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Patterns of Corporate Financing
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill ? How do we define debt ? Patterns of Corporate Financing
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Patterns of Corporate Financing
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Common Stock Book Value vs. Market Value Book 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Common Stock Example - Mobil Book Value vs. Market Value (12/97) Total Shares outstanding = million
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Common Stock Example - Mobil Book Value vs. Market Value (12/97) Total Shares outstanding = million
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Corporate Debt
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Corporate Debt continued
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Corporate Debt 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.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Derivatives Traded Options - A derivative that gives the firm the right (but not the obligation) to buy or sell an asset in the future at a price that is agreed upon today. Futures - A contractual obligation entered into in advance to buy or sell an asset or commodity. Forwards - A tailor made contract for the purchase of an asset. Not traded on exchanges like futures. Swaps - An agreement between two parties to exchange the interest rate characteristics of two loans.
How Corporations Issue Securities Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 15 © The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Topics Covered Venture Capital The Initial Public Offering The Underwriters General Cash Offers Rights Issue
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Venture Capital Money invested to finance a new firm
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Venture Capital Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually dispersed in stages, after a certain level of success is achieved. Venture Capital Money invested to finance a new firm
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Venture Capital
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Venture Capital
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Initial Offering Initial Public Offering (IPO) - First offering of stock to the general public. Underwriter - Firm that buys an issue of securities from a company and resells it to the public. Spread - Difference between public offer price and price paid by underwriter. Prospectus - Formal summary that provides information on an issue of securities. Underpricing - Issuing securities at an offering price set below the true value of the security.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill The Underwriters
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill The Underwriters
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Initial Offering Average Expenses on 1767 IPOs from
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Tombstone
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill General Cash Offers Seasoned Offering - Sale of securities by a firm that is already publicly traded. General Cash Offer - Sale of securities open to all investors by an already public company. Shelf Registration - A procedure that allows firms to file one registration statement for several issues of the same security. Private Placement - Sale of securities to a limited number of investors without a public offering.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Underwriting Spreads
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Rights Issue Rights Issue - Issue of securities offered only to current stockholders.
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Rights Issue Rights Issue - Issue of securities offered only to current stockholders. Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right?
© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill Rights Issue Current Market Value = 2mil x $24 = $264 mil Total Shares = 11 mil + 1 mil = 12 mil Amount of new funds = 1 mil x $22 = $22 mil New Share Price = ( ) / 12 = $23.83/sh Value of a Right = = $0.17 Example - AEP Corp currently has 11 million shares outstanding. The market price is $24/sh. AEP decides to raise additional funds via a 1 for 11 rights offer at $22 per share. If we assume 100% subscription, what is the value of each right?