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DESCRIPTION
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Introduction to Corporate
Finance and Governance
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Topics Covered
Creating Value with Financing Decisions
Common Stock
Preferred Stock
Corporate Debt
Convertible Securities
Patterns of Corporate Financing
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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
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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.
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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.
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Net common stockholders equity =
common stock account recorded at par
value +
the paid-in surplus +
retained earnings
the amount of repurchased or treasury stock.
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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.
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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
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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
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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%
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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Sources of Funds
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Patterns of Corporate Financing
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Venture Capital, IPOs, and Seasoned
Offerings
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Topics Covered
Venture Capital
The Initial Public Offering
The Underwriters
General Cash Offers by Public Companies
The Private Placement
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Venture Capital
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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
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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
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Venture Capital
Second Stage Market Value Balance Sheet ($mil)
Assets Liabilities and Equity
Cash from new equity 1.0 New equity from 2nd stage 1.0
Other assets 2.0 Equity from 1st stage 1.0
Your original equity 1.0
Value 3.0 Value 3.0
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Initial Offering
Initial Public Offering (IPO) - First offering of stock to the general public.
Underwriter - Firm that buys an issue of securities from a company and resells it to the public.
Spread - Difference between public offer price and price paid by underwriter.
Prospectus - Formal summary that provides information on an issue of securities.
Underpricing - Issuing securities at an offering price set below the true value of the security.
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Initial Public Offering
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Initial Public Offering
0
2
4
6
8
10
12
14
16
18
To
tal D
irec
t C
ost
s (%
of
issu
e)
Value of Issue ($mil)
IPOs
SEOs
Convertibles
Bonds
Expenses
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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
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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.
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Rights Issue
Rights Issue - Issue of securities offered only to
current stockholders.
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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?
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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?