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BRN 482 Corporate Financial Policy. Clifford W. Smith Summer 2007 Handout 5. * Covers readings on course outline through Barclay/Smith (1996). Financial Architecture. Leverage Bond covenants Public vs. private debt Maturity Priority Conversion rights Call provisions. - PowerPoint PPT Presentation
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BRN 482 Corporate Financial PolicyClifford W. SmithSummer 2007Handout 5* Covers readings on course outline through Barclay/Smith (1996)
Financial ArchitectureLeverageBond covenantsPublic vs. private debtMaturityPriorityConversion rightsCall provisions
Private vs. Public DebtLarger issues usually publicfixed registration feesunder-diversification of private lenders
The riskier the debt, the more likely that it will be privateeasier to renegotiateusually contains more, and more specific, contract provisions
Relation between Yield on Net Proceeds & Issue Size for Representative Private Placement and Public Issue DebtYield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAA
Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue Debt
Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue DebtBaa (Private)Yield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAASBAABaa (Public)
Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement and Public Issue DebtBaa (Private)Yield on Net ProceedsYNP (%)Aaa (Private)Aaa (Public)Issue Size ($)SAAASBAABaa (Public)
Investment Opportunity SetAssets inPlaceGrowthOpportunitiesCost of Longer Maturity Low High (Underinvestment)
Predicted Maturity Long Short
Investment Opportunity SetAssets inPlaceGrowthOpportunitiesCost of Low Priority Low High Fixed Claims(Creditor Conflicts)
Assets inPlaceGrowthOpportunitiesCost of Low Priority Low High Fixed Claims(Creditor Conflicts)
Concentration of Lower Greater Priority Classes
Investment Opportunity Set
Deregulation and Debt MaturityLeverage and Debt Maturity in the Telecommunications industry 1974-1994
Investment Opportunity SetFinancial Architecture Leverage High Low Maturity Long Short Priority(Table 5) Diffuse Concentrated Conversional RightsLow High Leasing(Table 4)High Low
Compensation Level of Pay Low High Conditional Pay Low HighAssets inPlaceGrowthOpportunities