1. Chapter 13 Fundamentals of Corporate Finance Fourth Edition An Overview of Corporate Financing Slides by Matthew Will Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

2. 13- 2 Irwin/McGraw Hill Topics Covered  Creating Value with Financing  Common Stock  Preferred Stock  Corporate Debt  Convertible Securities  Patterns of Corporate Financing

3. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 3 Irwin/McGraw Hill 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.

4. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 4 Irwin/McGraw Hill Common Stock Authorized 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.

5. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 5 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.

6. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 6 Irwin/McGraw Hill Common Stock Example - H.J. Heinz Book Value vs. Market Value (1/2001) Total Shares outstanding = 350 million

7. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 7 Irwin/McGraw Hill Common Stock Example - H.J. Heinz Book Value vs. Market Value (1/2001) Total Shares outstanding = 350 million

8. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 8 Irwin/McGraw Hill Common Stock

9. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 9 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.

10. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 10 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.

11. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 11 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.

12. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 12 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.

13. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 13 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.

14. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 14 Irwin/McGraw Hill 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.

15. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 15 Irwin/McGraw Hill 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.

16. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 16 Irwin/McGraw Hill Patterns of Corporate Financing

17. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 17 Irwin/McGraw Hill Patterns of Corporate Financing

18. Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved 13- 18 Irwin/McGraw Hill Web Resources www.federalreserve.gov/release/z1/current/data.htm Click to access web sites Internet connection required