an overview of corporate financing
DESCRIPTION
14-1 patterns of corporate financing How Firms Raise Funds Plowing back profits Seeking external financing Debt sources Equity sources Firms may raise funds from external sources or plow back profits, i.e., internal funds. External financing involves the choice between debt and equity.TRANSCRIPT
![Page 1: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/1.jpg)
Chapter
Brealey, Myers, and AllenPrinciples of Corporate
Finance11th Edition
AN OVERVIEW OF CORPORATE FINANCING
14
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
![Page 2: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/2.jpg)
14-2
14-1 PATTERNS OF CORPORATE FINANCING
• How Firms Raise Funds • Plowing back profits• Seeking external financing
• Debt sources• Equity sources
![Page 3: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/3.jpg)
14-3
FIGURE 14.1 SOURCES OF FUNDS, U.S. NONFINANCIAL CORPORATIONS
![Page 4: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/4.jpg)
14-4
TABLE 14.1 U.S. MANUFACTURING, THIRD QUARTER, 2011 ($ BILLIONS)
![Page 5: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/5.jpg)
14-5
14-1 PATTERNS OF CORPORATE FINANCING
• How Do We Define Debt?
52.856,7
362,2759,1assets Total
Debt
31.552,3618,1
618,1equitysliabilitie term-Longsliabilitie term-Long
![Page 6: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/6.jpg)
14-6
FIGURE 14.2 DEBT TO NET WORTH, NONFINANCIAL CORPORATIONS, 1955-2010
![Page 7: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/7.jpg)
14-7
14-2 COMMON STOCK
• Common Stock• Residual claim on assets and cash flow• Mostly held by financial institutions• Stockholders have ultimate right of control
![Page 8: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/8.jpg)
14-8
FIGURE 14.3 CORPORATE EQUITY HOLDINGS, THIRD QUARTER, 2011
![Page 9: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/9.jpg)
14-9
14-2 COMMON STOCK
• Voting Procedures• Board of directors comes up for re-election every year
• Classified board of directors• One-third of directors come up for re-election every year• Entrenches management
![Page 10: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/10.jpg)
14-10
14-2 COMMON STOCK
• Dual-Class Shares and Private Benefits• Some companies have two classes of stock• Same cash-flow rights, different control rights• Greater control rights grant private benefits
![Page 11: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/11.jpg)
14-11
14-2 COMMON STOCK
• Equity in Disguise• Partnerships
• Avoid corporate income tax• Limited life span
• Trusts• Passive ownership of asset
• Real Estate Investment Trust (REIT)• Not taxed• Limited to real estate
![Page 12: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/12.jpg)
14-12
14-2 COMMON STOCK
• Preferred Stock• Takes priority over common stock when receiving dividends
• Gains some voting rights if corporation fails to pay preferred dividend
![Page 13: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/13.jpg)
14-13
14-3 DEBT
• Debt Comes in Many Forms• Short-term versus long-term• Fixed versus floating rate• Dollars versus foreign currency• Senior versus junior debt• Straight versus convertible bonds
Loan Coupon = LIBOR + Spread FLOATING L+400 Bond Coupon = X% FIXED = 8.00%
![Page 14: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/14.jpg)
14-14
FIGURE 14.4 U.S. BOND HOLDINGS, THIRD QUARTER, 2011
![Page 15: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/15.jpg)
14-15
14-3 DEBT
• Debt by Any Other Name• Some debts treated differently in accounts
• Accounts Payable• Good received, not yet paid for
• Very short-term debt
• Unfunded obligations• Senior debt, e.g., employee pensions
• Special-Purpose Entities (SPEs)• Raise cash through equity and debt
• Do not show up on balance sheet
![Page 16: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/16.jpg)
14-16
FIGURE 14.5 FLOW OF SAVINGS TO INVESTMENT
![Page 17: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/17.jpg)
14-17
14-4 FINANCIAL MARKETS AND INSTITUTIONS
• Financial 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
![Page 18: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/18.jpg)
14-18
TABLE 14.2 FINANCIAL ASSETS OF U.S. INTERMEDIARIES, THIRD QUARTER, 2011
![Page 19: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/19.jpg)
14-19
14-4 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
![Page 20: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/20.jpg)
14-20
14-4 FINANCIAL MARKETS AND INSTITUTIONS
• Investment Funds• Exchange-Traded Fund (ETF)
• Portfolio bought or sold in single trade• Hedge Fund
• Restricted access• Limited partnership• Performance-related fees
![Page 21: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/21.jpg)
14-21
14-4 FINANCIAL MARKETS AND INSTITUTIONS
• Financial 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
![Page 22: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/22.jpg)
14-22
14-5 THE ROLE OF FINANCIAL MARKETS AND INTERMEDIARIES
• Payment Mechanism• Allows individuals to make and receive payments quickly and safely over long distances
• Borrowing and Lending• Channels savings towards those who can best use them
![Page 23: AN OVERVIEW OF CORPORATE FINANCING](https://reader034.vdocuments.net/reader034/viewer/2022051202/5a4d1b777f8b9ab0599b788a/html5/thumbnails/23.jpg)
14-23
14-5 THE ROLE OF FINANCIAL MARKETS AND INTERMEDIARIES
• Pooling Risk• Allows individuals to share risk, i.e., insurance companies
• Information• Allows estimation of expected rates of return