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
