Chap014 [Compatibility Mode]

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Chapter 14Principles of

Corporate FinanceTenth Edition

An Overview of

Corporate

Financing

14-2

Topics CoveredPatterns of Corporate Financing

Common Stock

Debt

Financial Markets and Institutions


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14-3

Patterns of Corporate Financing

Firms may raise funds from external

sources or plow back profits rather than

distribute them to shareholders. Retained earnings

Debt issue

Equity issue

Should a firm elect external financing, they

may choose between debt or equity sources.

14-4


-100%

-50%

0%

50%

100%

Internal funds Net equity issues Net borrowing


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14-5

Aggregate balance sheet for manufacturing corporations

in the United States, 2008 (figures in Billions).

Current assets 2,037$ Current liabilities 1,578$

Fixed assets 2,749 Long term debt 1,385

Less 1,459 Other long term 1,105

deprecication liabilities

Net fixed assets 1,291 Total long term liabilities 2,490

Other long term 3,515 Stockholders' equity 2,775

Total assets 6,843 Total liabilities and 6,843

stockholders' equity


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59.843,6

490,2578,1

assetsTotal

Debt

33.775,2385,1

385,1

equitysliabilitietermLong

sliabilitietermLong

How do we define debt ?



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14-7

Debt Ratios

DebtRatio,

%

Debt to Net Worth for Non-Financial Firms, 1950-2008

0%

10%

20%

30%

40%

50%

60%Market Debt Ratio Book Debt Ratio

Source: Board of Governors of the Federal Reserve System, Flow of Funds Table B.102

14-8


0

10

20

30

40

50

60

70

80

Debt

Ratio(%)

Italy

Japan(2005)

Germany

France

Spain

Portugal

Austria

U.S.A(2005)

Finland(2005)

Belgium

Netherlands


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14-9

Common Stock

Book Value vs. Market Value

Book value is a backward looking measure. It

tells us how much capital the firm has raised fromshareholders 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 StockExample Honeywell Book Value vs. Market Value (Dec. 08)

Total Shares outstanding = 735 million

7,187Value)(BookequitycommonNet

0sadjustmentOther

14,015-sharesTreasury

16,250earningsRetained3,994capitalinpaidAdditional

958par)($1SharesCommon


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Common Stock

Example Honeywell Book Value vs. Market Value (Dec. 08)

Total Shares outstanding = 735 million

million$25,725ValueMarket

735xsharesof#

$35.00/sh=priceMarket2008December

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Holdings of Corp Equities (2008)

Insurance

Companies

7.5

Mutual Funds,

etc.23.9

Rest of World

11.7

Other

1.9

Pension Funds

19.2

Households

35.7

Percent of Holdings


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14-13

Common stock

Ownership of the corporation

Cash flow rights

Control rights

Voting procedures

Majority voting

Cumulative voting

Dual-class shares and private benefits

Interest conflicts between majority and

minority shareholders tunneling

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Preferred StockPreferred 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 interestrates.


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14-15

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 Ratings are issued on debt instruments to

help investors assess the default risk of a firm.

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Corporate DebtLarge firms issue many different securities.

This table shows some of the debt securities on Honeywell's

balance sheet in December 2008.

US dollar debt

Bank loans

Commercial paperNotes

Unsecured debentures

Floating rate bonds

Zero coupon bonds

Money multiplier notes

Industrial development bonds


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Holdings of Corp Debt (2008)

Pension Funds

6.5

Insurance

Companies

19.9

Mutual Funds,

etc.

10.5

Rest of World

21.3

Other26.4

Banks

4.5

Households

10.9

Percent of Holdings

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Financial Manager Questions1. Should the company borrow short term or long

term?

2. Should the debt be fixed or floating?

3. Should you borrow dollars or some other

currency?

4. What promises should you make to the lender?

Senior or junior; secured or unsecured

5. Should you issue straight or convertible bonds?

Warrant; convertible


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Flow of savings to investment

14-20

Financial markets and institutionsFinancial Markets

Used to raise money through primary issues

Allow investors to trade amongst themselves

Help firms manage risks

Financial Intermediaries

Raise money from investors, provide financing

Banks, insurance companies, investment funds


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Financial markets and institutions

Investment Funds

Mutual Fund

Raises money by selling shares to investors

Attempts to beat market

Money Market Fund

Invests in short-term safe securities

Closed-End Fund

Fixed number of shares

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Financial markets and institutionsFinancial Institutions

Commercial banks

Provide loans, safe money storage

Investment banks

Assist companies in raising financing

Advise on takeovers, mergers, and acquisitions

Insurance companies

Invest in corporate stocks and bonds


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Web Resources

Click to access web sites

Internet connection required

www.census.gov/csd/qfr

www.federalreserve.gov/releases

Documents

Chap014 [Compatibility Mode]