代写An Overview of Corporate Financing

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  • Lecture 8
    An Overview of Corporate Financing
    How Corporations Issue Securities
    Topics Covered
    Patterns of Corporate Financing
    Common Stock
    Debt
    Financial Markets and Institutions
    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.
    Patterns of Corporate Financing
    Patterns of Corporate Financing
    Patterns of Corporate Financing
    Figure 14.2 debt to net worth, nonfinancial corporations, 1955-2010
    Patterns of Corporate Financing
    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 – Honeywell Book Value vs. Market Value (Dec. ‘08)
    Total Shares outstanding = 735 million
     
    Common Stock
    Example – Honeywell Book Value vs. Market Value (Dec. ‘08)
    Total Shares outstanding = 735 million



    Figure 14.3 corporate equity holdings, third quarter, 2011
    Issues with Common Stock
    Who owns the corporation?
    Voting procedures
    Dual class shares and private benefits
    Partnerships
    Trusts
    REITs (real estate investment trusts)


    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.
    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.
    Figure 14.4 u.s. bond holdings, third quarter, 2011
    Corporate Debt
    Financial Manager Questions
    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 Moody’s 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.
    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.
    Financial Markets
    Figure 14.5 flow of savings to investment
    14-4 financial markets and institutions
    •Financial Markets
    •Used to raise money through primary issues
    •Allow investors to trade amongst themselves
    •Help firms manage risks
    •Financial Intermediaries
    •Raise money from investors, provide financing
    •Banks, insurance companies, investment funds
    Topics Covered
    Venture Capital
    The Initial Public Offering
    Alternative Issue Procedures for IPOs
    Security Sales by Public Companies
    Rights Issue
    Private Placements and Public Issues
    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
    Venture Capital
    FIGURE 15.1 U.S VENTURE CAPITAL INVESTMENTS
    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.
    Motives For An IPO
    The Top Managing Underwriters
    Average Initial IPO Returns
    15-2 THE INITIAL PUBLIC OFFERING
    IPO Proceeds
    IPO Proceeds and First Day Returns
    General Cash Offers
    Seasoned Offering - Sale of securities by a firm that is already publicly traded.
    Rights Issues - Issues of securities offered only to current stockholders (non-dilutive)
    Cash Offer - Sale of securities open to all investors by an already public company. (dilutive)
    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.

    TABLE 15.3 UNDERWRITING SPREADS
    Total Direct Costs of Raising Capital
    15-4 SECURITY SALES BY PUBLIC COMPANIES
    15-4 SECURITY SALES BY PUBLIC COMPANIES
    15-4 SECURITY SALES BY PUBLIC COMPANIES
    15-4 SECURITY SALES BY PUBLIC COMPANIES