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Long-Term Financing: An: Mcgraw-Hill/Irwin

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74 views20 pages

Long-Term Financing: An: Mcgraw-Hill/Irwin

jtyj

Uploaded by

Phạm Đăng Khoa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Long-Term Financing: An

Introduction
Chapter 15

1-1
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
2

Key Concepts and Skills


• Describe the basic features of common and
preferred stock
• Understand the different types of bonds and how
bond characteristics impact the required yield
3

Outline
• Some Features of Common and Preferred Stock

• Corporate Long-Term Debt

• Some Different Types of Bonds

• Bank Loans

• International Bonds

• Patterns of Financing

• Recent Trends in Capital Structure


4

Features of Common Stock


• Voting rights (Cumulative vs. Straight)
• Proxy voting
• Classes of stock
• Other rights
• Share proportionally in declared dividends
• Share proportionally in remaining assets during
liquidation
• Preemptive right – first shot at new stock issue to
maintain proportional ownership if desired
5

Features of Preferred Stock


• Dividends
• Stated dividend must be paid before dividends can be
paid to common stockholders
• Dividends are not a liability of the firm, and preferred
dividends can be deferred indefinitely
• Most preferred dividends are cumulative – any missed
preferred dividends have to be paid before common
dividends can be paid
• Preferred stock generally does not carry voting
rights
6

Debt versus Equity


• Debt • Equity
• Not an ownership interest • Ownership interest
• Creditors do not have • Common stockholders vote
voting rights for the board of directors and
• Interest is considered a other issues
cost of doing business and • Dividends are not
is tax deductible considered a cost of doing
• Creditors have legal business and are not tax
recourse if interest or deductible
principal payments are
• Dividends are not a liability
missed
• Excess debt can lead to
of the firm, and stockholders
financial distress and have no legal recourse if
bankruptcy dividends are not paid
• An all-equity firm cannot go
bankrupt
7

The Bond Indenture


• Contract between the company and the bondholders
that includes:
• The basic terms of the bonds
• The total amount of bonds issued
• A description of property used as security, if
applicable
• Sinking fund provisions
• Call provisions
• Details of protective covenants
8

Bond Classifications
• Registered vs. Bearer Forms
• Security
• Collateral – secured by financial securities
• Mortgage – secured by real property, normally land or
buildings
• Debentures – unsecured
• Notes – unsecured debt with original maturity less
than 10 years
• Seniority
9

Required Yields
• The coupon rate depends on the risk characteristics
of the bond when issued
• Which bonds will have the higher coupon, all else
equal?
• Secured debt versus a debenture
• Subordinated debenture versus senior debt
• A bond with a sinking fund versus one without
• A callable bond versus a non-callable bond
10

Zero-Coupon Bonds
• Make no periodic interest payments (coupon rate =
0%)
• The entire yield to maturity comes from the
difference between the purchase price and the par
value
• Cannot sell for more than par value
• Sometimes called zeroes, deep discount bonds, or
original issue discount bonds (OIDs)
• Treasury Bills and principal-only Treasury strips are
good examples of zeroes
11

Pure Discount Bonds


Information needed for valuing pure discount bonds:
• Time to maturity (T) = Maturity date - today’s date

• Par value (face value, F)

• Discount rate (r)

$0 $0 $0 $F

0 1 2 T 1 T

Present value of a pure discount bond at time 0:


F
PV 
(1  r ) T
12

Pure Discount Bonds: Example

Find the value of a 30-year zero-coupon bond with


a $1,000 par value and a YTM of 6%.

$0 $0 $0 $1,000 0,1$

3
9
12
0
$
0


0 1 2 29 30
13

Floating Rate Bonds


• Coupon rate floats depending on some index value
• Examples – adjustable rate mortgages and inflation-
linked Treasuries
• There is less price risk with floating rate bonds
• The coupon floats, so it is less likely to differ
substantially from the yield to maturity
• Coupons may have a “collar” – the rate cannot go
above a specified “ceiling” or below a specified
“floor”
14

Other Bond Types


• Income bonds

• Convertible bonds

• Put bonds

• There are many other types of provisions that can


be added to a bond, and many bonds have several
provisions – it is important to recognize how these
provisions affect required returns
15

Bank Loans
• Lines of Credit
• Provide a maximum amount the bank is willing to lend
• If guaranteed, referred to as a revolving line of credit

• Syndicated Loan
• Very large banks frequently have more demand for loans
than they have supply
• Small regional banks are often in the opposite situation
• As a result, a very large bank may arrange a loan with a
firm or country and then sell portions of the loan to a
syndicate of other banks
• A syndicated loan may be publicly traded
16

International Bonds
• Eurobonds: bonds denominated in a particular

currency and issued simultaneously in the bond


markets of several countries
• Foreign bonds: bonds issued in another nation’s

capital market by a foreign borrower


17

Patterns of Financing
• Internally generated cash flow dominates as a
source of financing
• This preference has increased through time

• Net stock buybacks accelerated in 2002-2007 in


the U.S.
• Declined in 2008, likely as a result of the
financial crisis
18

The Long-Term Financial Deficit


Uses of Cash Sources of Cash
Flow (100%) Flow (100%)

Capital Internal cash


spending flow (retained
80% earnings plus Internal
depreciation) cash flow
80%
Financial
deficit
Net
working
capital plus Long-term External
other uses debt and cash flow
20% equity 20%
19

Recent Trends in Capital Structure


• Which are best: book or market values?
• In general, financial economists prefer market values
• However, many corporate treasurers may find book
values more appealing due to the volatility of market
values
• Whether we use book or market values, debt
ratios for U.S. non-financial firms have been
below 50 percent of total financing
20

Quick Quiz
• Describe the basic characteristics of common and
preferred stock.
• Differentiate between cumulative voting and straight
voting.
• Identify the rights of shareholders and bondholders.
• How would the following characteristics impact the
yield on a bond:
• Callable
• Sinking Fund

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