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7/29/2019 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
Patterns of Corporate Financing
-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
Patterns of Corporate Financing
14-6
59.843,6
490,2578,1
assetsTotal
Debt
33.775,2385,1
385,1
equitysliabilitietermLong
sliabilitietermLong
How do we define debt ?
Patterns of Corporate Financing
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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
Patterns of Corporate Financing
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.
14-10
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
14-12
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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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
14-14
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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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.
14-16
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
14-18
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
14-22
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