1. An Overview of Corporate Financing
Principles of
Corporate Finance
Tenth Edition
Chapter 14
An Overview of Corporate Financing
Slides by
Matthew Will
McGraw-Hill/Irwin
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 1 1 1 1 1 2

2. Topics Covered Patterns of Corporate Financing Common Stock Debt
Financial Markets and Institutions 2 2 2 2 3 2

3. Patterns of Corporate Financing
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. 20

4. Patterns of Corporate Financing

5. Patterns of Corporate Financing20

6. Patterns of Corporate Financing
How do we define debt ? 20

7. Debt to Net Worth for Non-Financial Firms, 1950-2008
Debt Ratios
Debt to Net Worth for Non-Financial Firms,
Debt Ratio, %

8. Patterns of Corporate Financing

9. 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. 8

10. Common Stock
Example – Honeywell Book Value vs. Market Value (Dec. ‘08) Total Shares outstanding = 735 million 9

11. Common Stock
Example – Honeywell Book Value vs. Market Value (Dec. ‘08) Total Shares outstanding = 735 million 10

12. Holdings of Corp Equities (2008)
Percent of Holdings

13. 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. 14

14. Issues with Common Stock
Who owns the corporation?
Voting procedures
Dual class shares and private benefits
Partnerships
Trusts
REITs

15. 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. 15

16. Corporate Debt

17. 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. 16

18. 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. 17

19. 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. 18

20. 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. 19

21. Holdings of Corp Debt (2008)
Percent of Holdings

22. Financial Manager Questions
Should the company borrow short term or long term?
Should the debt be fixed or floating?
Should you borrow dollars or some other currency?
What promises should you make to the lender?
Should you issue straight or convertible bonds?

23. Financial Markets
Money
Primary
Markets
OTC
Markets
Secondary
Markets

24. Financial Institutions
Company
Obligations
Funds
Intermediaries
Banks
Insurance Cos.
Brokerage Firms

25. Financial Institutions
Intermediaries
Obligations
Funds
Investors
Depositors
Policyholders

26. Web Resources Click to access web sites Internet connection required