long-term financing
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Long-Term Financing. Professor XXXXX Course Name / Number. Common Stock and Long-Term Debt. Long-Term Financing. Common stockholders are residual claimants No claim to earnings or assets until all senior claims are paid in full High risk, but historically also high return. - PowerPoint PPT PresentationTRANSCRIPT
Long-Term Financing
Professor XXXXXCourse Name / Number
2
Common Stock and Long-Term Debt
• Common stockholders are residual claimants– No claim to earnings or assets until all senior
claims are paid in full– High risk, but historically also high return
Long-Term Financing
Debt capital represents a legally enforceable claim
Equity capital
3
Common Stock
Par value Denomination. Little economic relevance today
Shares authorized, outstandin
g, and issued
Maximum number of shares that can be issued
Additional paid-in capital
Amount received in excess of par value when corporation initially sold stock
4
Common Stock
Market capitalizati
on
Market price/share x number shares outstanding
Treasury stock
Stock purchased on open market by corporation. Usually purchased for
stock options
Stock split Two-for-one split issues one new share for each already held. Done to reduce
per share price
5
Book Value Of Stockholders’ Equity In IBM
2001 2000
Preferred stock, par value $0.01 per share -- $ 247
shares authorized: 150,000,000
shares issued: 2,546,011
Common stock, par value $0.20 per share
$14,248
12,400
shares authorized: 4,687,500,000
shares issued: (2001: 1,913,513,218; 2000: 1,893,940,595)
Retained earnings
30,142
23,784
Treasury stock, at cost Shares (2001: 190 mm; 2000: 131 mm)
(20,114)
(13,800)
Employee trust benefits, at cost -- (1,712)
Accumulatd gains & losses not affecting RE (662) (295)
Total stockholders’ equity
$23,614
$20,624
Source: IBM website (www.ibm.com /annualreport)
6
Rights Of Common Stockholders
Voting rights of common stockholders can be exercised in person or by proxy.
Most US corporations have majority voting. Each share gives one vote for
each director’s position.
Cumulative voting gives minority shareholders greater chance of electing
one or more directors.
Shareholders do not have a legal right to receive dividends.
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Preferred Stock
Preferred stock is an equity claim, though fixed in amount.
– Claim on assets and cash flow senior to common stock– As equity security, dividend payments are not tax
deductible for the corporation and are subject to personal income tax.
– For tax reasons, straight preferred stock held mostly by corporations.
Promises a fixed annual dividend payment, but not legally enforceable; firms cannot pay common stock dividends if
preferred stock in arrears.
Preferred stockholders usually do not have voting rights.Venture capitalists an exception: they have control rights
and receive board of directors seats.
8
Methods Of Classifying Long-Term Debt
Maturity
Short-term: Bills
Intermediate-term: Notes
Long-term: BondsOnly long-term debt is part of a
corporation’s capitalization
SeniorityRank in priority of claims to assets and cash flow. Senior versus subordinated
debt
Interest payment method
Floating or fixed rate debt
9
Methods Of Classifying Long-Term Debt
Callability
Firms could retire and reissue debt if interest rates fall.
Most US corporate debt is callable by firm.
Security
Is debt secured by explicit collateral?
Mortgages: secured by real estate
Equipment trust receipts:secured by transportation equipment
Debentures: no explicit collateral
10
Methods Of Classifying Long-Term Debt
Method of principal
repayment
Bullet loans: principal repaid in a lump sum at maturity
Amortized loans: equal periodic principal and interest payments
Security versus loan
product
Capital market instruments:bonds, notes, bills are securities
Syndicated bank loans the most important loan products
11
Short-Term and Long-Term US Dollar Debt of IBM
Short-term debt Commercial paper1 $ 4,809 Short-term loans 1,564 Long-term debt: Current maturities 4,815 Total $11,118
Long-term debt (In US Dollars) Debentures: Maturities Amount
6.22% 2027 $ 500 6.5% 2028 700 7% 2025 600 7% 2045 150 7.125% 2096 850 7.5% 2013 550 8.375% 2019 750
Notes: 6.3% average 2001-2014 2,772 MTN program: 5.8% avg 2001-2014 3,620 Other: 6.8% average 2001-2012 828
$11,320
Source: IBM website (www.ibm.com /annualreport)
12
Foreign Currency and Total Long-Term Debt Of IBM
Dollar Value of Foreign Currency Debt 2 Euros (4.4%) 2002-2005 $ 3,042 Japanese yen (1.1%) 2002-2014 $ 4,749 Canadian dollars (5.8%) 2002-2005 441 Swiss francs (4.0%) 2002-2003 151 Other (6.1%) 2002-2014 726 $20,429 Less: Net unamortized discount 47 Less: Current maturities 4,815 Total Long-Term Debt $15,963
Notes: 1 The weighted-average interest rates for commercial paper was 1.9% on December 31, 2001.
2 Values translated into dollars using exchange rate in force onDecember 31, 2001. Average interest rates in parentheses.
Source: IBM website (www.ibm.com/annualreport)
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Basic Choices In Long-Term Financing
Corporations face four key decision variables each year:
– How much capital is needed for investment, other purposes?
– How much capital to raise externally vs. internally?
– Should external funds be raised on capital markets or via financial intermediaries?
– Fraction of external capital as debt vs. equity?Internal financing: cash flow from operations minus cash dividends
Amount not fixed: firm can vary dividends and capital structure
Corporations are almost always net dissavers.
14
Sources Of Funds For Non-Financial U.S. Corporations
2000 1999 1996 1990 1980
Sources = Uses ($Billion) 1,535 1,503 1,051 538 387 Capital expenditures 1,021 907 685 430 262
Internal Sources
Profit after tax 410 372 310 141 116 - Dividends (264) (248) (201) (118) (45)
+ Depreciation 667 622 506 371 159 Total internal sources 887 806 678 432 207
External Sources
?Incrse non-mkt liabilities 387 404 313 120 139 Net raised in markets 301 338 80 64 83
Net new equity issues -153 -143 -70 -63 10 Net debt issues 447 482 149 127 73 Net ext = Financial deficit 648 697 373 106 180
Internal funding as % total 58 54 65 80 54 Financial deficit as % total 42 46 35 20 46
Fincl market funds % total 19 20 8 12 21
Net equity issues % total -10 -10 -7 -12 3
Source: Federal Reserve System data, reported in Statistical Abstract of the United States, various issues.
15
Banks Are The World’s Largest Corporations—But Only By Assets
Bank Name CountryTotal
Assets ($US
Billions)
Global Asset
Ranking
Mizuho Holdings Japan $1,304,342 1
Citigroup US 902,210 2
Deutsche Bank Germany 882,541 3
Bank of Tokyo-Mitsubishi
Japan 716,934 4
J.P. Morgan Chase US 715,348 5
HSBC Holdings Britain 674,381 7
Hypovereinsbank Germany 672,692 8
UBS Switzerland 671,118 9
BNP Paribas France 651,590 10Source: “Fortune Global 500: The World’s Largest Corporations”, Fortune (July 23, 2001)
16
External Financing Patterns For G-7 Countries: Averages For 1984-1991
Country
External financing as a percent of total financing
United States
23%
Japan
56
Germany
33
France
35
Italy
33
United Kingdom
49
Canada
42
Source: Rajan and Zingales, “What do We Know About Capital Structure: Some Evidence from International Data,” Journal of Finance 50 (December 1995).
17
Net External Financing, G-7 Countries: Average 1984-1991
Country
Net debt issuance, % of total external
Net equity issuance, % of total external
United States
134%
-34%
Japan
85
15
Germany
87
13
France
39
61
Italy
65
35
United Kingdom
72
28
Canada
72
28
Source: Rajan and Zingales, “What do We Know About Capital Structure: Some Evidence from International Data,” Journal of Finance 50 (December 1995).
18
Annual Global Securities Issuance: Patterns
Securities 1990 - 2000 2001 2002
Issued on public capital markets
$20 trillion$4.07 trillion
$3.9 trillion
Private placement $3-4 trillion$500 billion
$417 billion
U.S. issuers account for two-thirds of total public issue volume.
Debt issues are over three-fourths of US total every year.Equity issues play small financing role everywhere.
Source: Investment Dealers’ Digest, various early January issues, 1991-2003.
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Number And Value Of Worldwide Security Issues In 2002
Security Type # OfferingsValue $US
Billions
Total Debt & Equity 1 14,070 $3,902
U.S Issuers Worldwide 1 9,721 $2,790
Global Debt 12,099 $3,600
Global Long-Term Straight Debt 2
8,934 $3,198
Global Equity 1,724 $209
1 Totals do not include privatizations or sovereign debt offerings.2 Excluding Mortgage- and asset-backed securities or U.S. municipal bonds.Source: Investment Dealers’ Digest, January 6, 2003.
20
U.S. Public Security Offerings, 2002
Security Type # Offerings Value $US Billion
Long-Term Debt 5,942 $2,231
Short-Term Debt 3,162 $395
High-Yield Debt 255 $58
Mortgage-Backed Securities 980 $768
Tax-Exempt Municipal Bonds
13,132 $337
Convertible Debt & Preferred
137 $60
Nonconvertible Preferred 112 $17
Common Stock (Including IPOs)
540 $104
Initial Public Offerings 97 $27Source: Investment Dealers’ Digest, January 6, 2003.
21
Law And Finance-Legal SystemsCountries/Legal Systems
External Cap/GDP
Private Debt/GD
P
Domestic
Firms/Pop
Shareholder Rights
English common law countries
0.60 0.68 35.45 3.39
French civil law countries
0.21 0.45 10.00 1.76
German civil law countries
0.46 0.97 16.79 2.00
Scandinavian law countries
0.30 0.57 27.26 2.50
All countries 0.44 0.59 21.59 2.44
Source: Rafael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, “Legal Determinants of External Finance”, Journal of Finance 52 (July 1997), pp. 1131-1150
22
Ownership Structure And Corporate Governance In Continental Europe
Source: ‘Lean, Mean and European; A Survey of European Business,” The Economist (April 29, 2001), p.12
23
Global Mergers and Acquisitions, 1991-2002 (US Dollar Billions)
0
500
1000
1500
2000
2500
3000
3500
4000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
U.S. targets Non-U.S. targets
Source: Judy Radler Cohen, “M&A: Hoping for Recovery,” Investment Dealer’s Digest (January 14, 2002), pp. 29-43, and previous IDD issues
24
Pension Funds And Capital Markets
Source: The Economist (May 20, 2000), p.127
25
Pension Funds And Capital Markets
Source: The Economist (February 3, 2001), p.54
Long-term financing instruments: common and preferred stock, debt
Financial deficit: difference between firm’s total funding needs and internally
generated cash flows
Financial intermediaries are institutions that raise funds by selling claims on themselves
Volume of security issues surged eight-fold in 11 years
Long-Term Financing