1. FINANCING DECISIONS How to Finance Assets
Debt Instruments
Mortgage Bonds- secured with real estate
Chattel Bonds- secured with personal property
Unsecured Debt
Debentures- Backed by name only
“Junk Bonds”- Very high risk, high yield
Payment made on debt is interest

2. FINANCING DECISIONS Equity Securities- Shares of ownership in company
Common Stock
Voting rights
Price Volatile
Last to receive Value Created- dividends
Preferred Stock
Preference over common for dividends
no voting rights
higher yield than common

3. FINANCING DECISION RULE
FINANCING SHOULD RESULT IN MAXIMUM SHAREHOLDER VALUE
To maximize value- maximize stock price
To maximize Stock price- maximize EPS
EPS = Net Income/ No. shares common stock outstanding

4. MAXIMIZING FIRM VALUE Example- 1. Assume EPS = $3.00/Share
2. If Valuation multiple is 25, then Market Price is $75/Share
3. Multiply Shares Outstanding by Market Price
(EG) 20,000,000 shares X $75/share = $1,500,000,000
4. If EPS rises to $4.00/share, then market value increases to
20,000,000 shares X $100/ share = $2,000,000,000
5. Share price is 25 x $4.00/share = $100/share

5. EBIT-EPS ANALYSIS EBIT operating earnings
LESS: INTEREST debt x int. rate
NIBT pre-tax earnings
LESS: TAX NIBT x tax rate
NIAT NIBT-TAX
LESS: P/S DIV Niat x Payout rate
EARNINGS AVAIL NIAT-P/S Div
No. shares C/S O/S Earnings available/ CS OS
= EPS Earnings per Share

6. EBIT-EPS ANALYSIS EBIT $10000 Operating Earnings
Less: Interest $20000x.05
NIBT EBIT-Interest
Less: Tax NIBTx .50
NIAT NIBT-TAX
Less: P/S DIV NIAT-(PSxRATE)
Earnings Available NIAT-P/S DIV
=EPS $.30
NO. Shares C/S O/S / 10000

7. EBIT-EPS EXAMPLE Current Structure EBIT $150000
LESS: INT ($250000X.10)
NIBT
LESS: TAX (.50)
NIAT
LESS: P/S DIV
EARNINGS AVAIL .
No. shares C/S O/S
=EPS $1/Share

8. FINANCING NEW PROJECT 1. Project cost is $400000
2. Additional EBIT will be $200000
3. Tax rate is .50
4. Can finance with all debt at .06 or,
5. Issue new shares at $8/Share
6. Existing Capital Structure remains in place
7. Calculate EPS under each alternative
8. NO. SHARES O/S IS 50000
9. Pick Financing method with higher EPS

9. FINANCING NEW PROJECT CURRENT DEBT COMMON EBIT $150000 $300000 $300000
-INT
NIBT
-TAX (.50)
NIAT
-P/S DIV
EARN. AV
/ C/S O/S
EPS $1/SH $1.85/SH $1.25/SH