Sie sind auf Seite 1von 33

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

Retained Earnings

Value of security
shown on certificate.

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

Common Shares ($.25 par)

108

Additional paid in capital

403

Retained earnings

4,857

Treasury shares at cost - 2,928


Other

- 546

Net common equity (Book Value)

1,894

Common Stock
Example - H.J. Heinz Book Value vs. Market Value (4/2004)
Total Shares outstanding = 352 million

April 2004 Market price =

$38/sh

# of shares

x 352

Market Value

$13.376 billion

Common Stock
Corporate Equity Holdings
Banks & Savings
2%
Other
1%

Mutual Funds
22%

Households
40%
Pension Funds
17%
Rest of World
11%

Insurance
Companies
7%

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
Venture Capital
Money invested to finance a new firm

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
First Stage M arket Value Balance Sheet ($mil)
Assets

Liabilitie s and Equity

Cash from new equity 0.5 New equity from venture capital 0.5
Other assets 0.5
Value

1.0

Your original equity 0.5


Value

1.0

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

Total Direct Costs (% of issue)

Initial Public Offering


18
16
14
12
10

Expenses
IPOs
SEOs
Convertibles
Bonds

8
6
4
2
0
Value of Issue ($mil)

The Underwriters
Top U.S.Underwriters in 2004
($bil of total issues)

Citigroup

$534

Morgan Stanley

414

JPMorgan

386

Lehman Brothers

370

Lerrill Lynch

370

CS/First Boston

362

Deutsche Bank

335

UBS

300

Goldman Sachs

286

Bank of America

204

All Underwrit ers

$3,564

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
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?
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