chapter 13 fundamentals of corporate finance fourth edition an overview of corporate financing...

Chapter 13Fundamentals of

Corporate FinanceFourth Edition

An Overview of Corporate Financing

Slides by

Matthew Will

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

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

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Topics Covered

Creating Value with FinancingCommon StockPreferred StockCorporate DebtConvertible SecuritiesPatterns of Corporate Financing


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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 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.


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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 (1/2001)

Total Shares outstanding = 350 million

1,543Value)(Book equity common Net

888-Other

2,908-costat sharesTreasury

4,887earnings Retained

344capitalin paid Additional

108par) ($.25 SharesCommon


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Common Stock

Example - H.J. Heinz Book Value vs. Market Value (1/2001)

Total Shares outstanding = 350 million

billion $14.0ValueMarket

350x shares of #

$40/sh= priceMarket 2001January


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Common StockCorporate Equity Holdings

Mutual Funds19%

Pension Funds21%

Insurance Companies

7%

Rest of World11%

Households39%

Other3%


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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 plow back 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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0

0.2

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1

% o

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80

82

84

86

88

90

92

94

96

98

20

00

Year

Sources of Funds

Net Equity Issues

Debt Instruments

Internal Funds



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Debt Equity Ratios for Nonfinancial Corp Sector

0

0.1

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0.3

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0.5

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1

88 90 92 94 96 98 2000Year

Lo

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rm D

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D/E Book

D/E Market



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Web Resources

www.federalreserve.gov/release/z1/current/data.htm

Click to access web sitesClick to access web sites

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chapter 13 fundamentals of corporate finance fourth edition an overview of corporate financing...

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