Download - Long term financing
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Long term financing
Chapter 12: 2,5,8,13,15Chapter 13: 6,8,16,23Chapter 14: 1,3,9,11Chapter 20: 6,12,16
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Characteristics of stock vs. debt
• Debt vs. Equity– Residual claim? – Payments are tax deductible?– Finite life?– Voting rights?
• Hybrid securities (preferred)
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Characteristics of debt securities
• Security• Seniority• Callable• Convertible• Covenants
• Credit rating
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Example: Estimating debt ratios (MV) with complex capital structures
Kmart is trying to estimate its debt ratio. It has 1 million shares outstanding, trading at $50 per share, and $250 million in straight debt outstanding (with a yield ot maturity of 9%). It also has two other securities outstanding:
1) it has 200,000 warrants outstanding, conferring on ints holders the right to buy stock at $65 per share. These warrants are trading at $12 each.
2) It also has 10,000 20-year convertible bonds outstanding, with a coupon rate of 6% and 10 years to maturity. These bonds trade at par.
Estimate the debt ratio in market value terms.
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Example: Value of convertible bonds
• At the end of 2003, GM had an 8.25% convertible bond, coming due in the year 2011, which was trading at $1400. It also had straight bonds, with the same maturity, trading in December 2003 at a yield of 8.4%. What is the value of the conversion option?
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Corporate bond yield spreads
Rating: 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 30 yrAaa/AAA 9 13 16 31 52 70 84Aa2/AA 39 41 43 64 81 94 116A2/A 89 108 110 118 126 146 162Baa2/BBB 109 126 131 151 168 187 202Ba2/BB 320 340 350 380 400 425 475B2/B 465 485 495 520 555 580 630Caa/CCC 755 765 775 840 890 945 985
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