Introduction to Corporate

Finance and Governance

Topics Covered

Creating Value with Financing Decisions

Common Stock

Preferred Stock

Corporate Debt

Convertible Securities

Patterns of Corporate Financing

Types of Securities

Equity Common stock

Preferred stock

Debt Commercial paper

Debentures

Guaranteed notes

Remarketable debt

Euro notes

Sterling notes

New Zealand dollar notes

Bank loans

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.

Common Stock

Authorized Share Capital

Maximum number of shares that the company is

permitted to issue, as specified in the firms

articles of incorporation.

Par Value

Value of security

shown on certificate.

Retained Earnings

Earnings not paid out

as dividends.

Net common stockholders equity =

common stock account recorded at par

value +

the paid-in surplus +

retained earnings

the amount of repurchased or treasury stock.

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.

Common Stock

Example - H.J. Heinz Book Value vs. Market Value (4/2004)

Total Shares outstanding = 352 million

1,894Value)(Book equity common Net

546-Other

2,928-costat sharesTreasury

4,857earnings Retained

403capitalin paid Additional

108par) ($.25 SharesCommon

Common Stock

Example - H.J. Heinz Book Value vs. Market Value (4/2004)

Total Shares outstanding = 352 million

billion $13.376ValueMarket

352x shares of #

$38/sh= priceMarket 2004 April

Common Stock

Corporate Equity Holdings

Mutual Funds

22%

Pension Funds

17%

Insurance

Companies

7%

Rest of World

11%

Households

40%

Other

1%

Banks & Savings

2%

Preferred Stock

Preferred Stock - Stock that takes

priority over common stock in

regards to dividends.

Net Worth - Book value of common

shareholders equity plus preferred

stock.

Floating-Rate Preferred - Preferred

stock paying dividends that vary with

short term interest rates.

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 Ratingsare issued on debt instruments to

help investors assess the default risk of a firm.

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.

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

Moodys or BBB or above by S&P.

Junk Bond - Bond with a rating below Baa or BBB.

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.

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.

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.

Sources of Funds

Patterns of Corporate Financing

Venture Capital, IPOs, and Seasoned

Offerings

Topics Covered

Venture Capital

The Initial Public Offering

The Underwriters

General Cash Offers by Public Companies

The Private Placement

Venture Capital

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

Venture Capital

1.0Value1.0Value

0.5equity originalYour 0.5assetsOther

0.5capital venturefromequity New0.5equity new fromCash

Equity and sLiabilitieAssets

($mil)Sheet Balance ValueMarket StageFirst

Venture Capital

Second Stage Market Value Balance Sheet ($mil)

Assets Liabilities and Equity

Cash from new equity 1.0 New equity from 2nd stage 1.0

Other assets 2.0 Equity from 1st stage 1.0

Your original equity 1.0

Value 3.0 Value 3.0

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.

Initial Public Offering

Initial Public Offering

0

2

4

6

8

10

12

14

16

18

To

tal D

irec

t C

ost

s (%

of

issu

e)

Value of Issue ($mil)

IPOs

SEOs

Convertibles

Bonds

Expenses

The Underwriters

564,3$ers UnderwritAll

204America ofBank

286SachsGoldman

300UBS

335Bank Deutsche

362BostonCS/First

370Lynch Lerrill

370BrothersLehman

386MorganJP

414StanleyMorgan

$534Citigroup

issues) total of ($bil

2004 in rsUnderwrite U.S. Top

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.

Rights Issue

Rights Issue - Issue of securities offered only to

current stockholders.

Rights Issue

Rights Issue - Issue of securities offered only to

current stockholders.

Example - YRU Corp currently has 9 million shares outstanding. The market price is $15/sh. YRU decides to raise additional funds via a 1 for 3 rights offer at $12 per share. If we assume 100% subscription, what is the value of each right?

Rights Issue

Current Market Value = 9 mil x $15 = $135 mil

Total Shares = 9 mil + 3 mil = 12 mil

Amount of new funds = 3 mil x $12 = $36 mil

New Share Price = (135 + 36) / 12 = $14.25/sh

Value of a Right = 15 - 14.25 = $0.75

Example - YRU Corp currently has 9 million shares

outstanding. The market price is $15/sh. YRU decides to raise

additional funds via a 1 for 3 rights offer at $12 per share. If we

assume 100% subscription, what is the value of each right?