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Chapter 15

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    • 1. Chapter Fifteen: Introduction to Long-Term Financing
    • 2. 15- Chapter Outline 15.1 Common Stock 15.2 Corporate Long-Term Debt: The Basics 15.3 Preferred Stock 15.4 Patterns of Long-Term Financing 15.6 Summary and Conclusions McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 3. 15- Financing in general • Long term versus Short term • The business of a company needs to be funded by a mix of long and short term cash • Short term examples are: payables and LOC • Long term examples are in this chapter • Short term financing typically ‘cycles’ and is increases in usage and then is paid off (over a year period, for example) • Long term financing will be paid off over the long term McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 4. 15- 15.1 Common Stock • Par and No-Par Stock • Authorized versus Issued Common Stock • Contributed Surplus • Retained Earnings • Market Value, Book Value, and Replacement Value • Shareholders’ Rights • Dividends • Classes of Stock McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 5. 15- Hierarchy of Claim 1. Bonds/Debtholders 2. Preferred Shares 3. Common Shares residual claim • CS holders have limited liability and get dividends if the Board grants them. All they can lose is the share value. • This is why DDM can be practically problematic McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 6. 15- Shareholders’ Equity (15.1) • Is found on the Balance Sheet • Is a point in time (given that it is on the B/ S) • Provides a breakdown of the ownership of the company and the classes of shares in the equity component of the capital structure (common and otherwise) McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 7. 15- Par and No-Par Stock • The stated value on a stock certificate is called the par value. – Par value is an accounting value, not a market value. – The total par value (the number of shares multiplied by the par value of each share) is sometimes called the dedicated capital of the corporation. • This concept is archaic and is not typical nowadays Ex: you may see par value of stock issued at $0.50 and now worth $100 per share. • This excess value has to be included somewhere on the financials (more in a moment) McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 8. 15- Par and No-Par Stock • Some stocks have no par value. – Typically in Canada, there is no particular par value assigned to stock. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 9. 15- Authorized vs. Issued Common Stock • The articles of incorporation must state the number of shares of common stock the corporation is authorized to issue. • The board of directors, after a vote of the shareholders, may amend the articles of incorporation to increase the number of shares. – Authorizing a large number of shares may worry investors about dilution because authorized shares can be issued later with the approval of the board of directors but without a vote of the shareholders. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 10. 15- Contributed Surplus • Usually refers to amounts of directly contributed equity capital in excess of the par value. • For example, suppose 1,000 shares of common stock having a par value of $1 each are sold to investors for $8 per share. The contributed surplus would be ($8 – $1) × 1,000 = $7,000 McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 11. 15- Retained Earnings • Not many firms pay out 100-percent of their earnings as dividends. • The earnings that are not paid out as dividends are referred to as retained earnings. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 12. 15- A quote • TSX • www.tmx.com • Look at RIM; Shareholders’ Equity • www.rim.com pg 62 Annual Report • Look at Consolidated Statement of SE (pg 63) • Concept of Comprehensive Income McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 13. 15- Market Value, Book Value, and Replacement Value $P × # shares outstanding • Market Value is the price of the stock multiplied by the number of shares outstanding. – Also known as Market Capitalization [ex: small cap] – Common stocks of Canadian corporations trade on the Toronto Stock Exchanges (TSX) and U.S. stock exchanges (NYSE, NASDAQ). sum[Par value, Contributed suplus, accum. R/E] • Book Value (accountant’s number) – The sum of par value, contributed surplus, accumulated retained earnings, and adjustments to equity is the common equity of the firm, usually referred to as the book value of the firm. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 14. 15- Closing the loop... • We previously discussed BV/MV • Higher BV/MV stocks should perform better in the future than lower BV/MV stock • The logic is that the intrinsic value of the equity is higher than the market value • Over time, the market should identify this value and incorporate it into the stock price McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 15. 15- Market Value, Book Value, and Replacement Value (continued) Example: XYZ Inc. Shareholder’s Equity at Book Value, 2003 (in $ thousands) Preferred Shares $ 717,300 Common stock 1,897,300 Retained earnings 1,511,400 Total shareholders’ equity $4,126,000 There are 100,000 common shares outstanding. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 16. 15- BV/MV • BV • (RE+Contribution Surplus)/100000= • (1,511,400+1,897,300)/100000=34.09/share • MV • Current Stock Price = 35.50 • This market cap=35.50*100,000=3,550,000 McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 17. 15- Market Value, Book Value, and Replacement Value (continued) • Replacement Value – The current cost of replacing the assets of the firm. – Replacement value is a fall-back position for entrepreneurs • At the time a firm purchases an asset, market value, book value, and replacement value are equal. – The market-to-book ratio of common stock and Tobin’s Q (market value of assets / replacement value of assets) are indicators of the success of the firm. – If these ratios are greater than one, then this indicates that the firm has done well with its investment decisions. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 18. 15- Shareholders’ Rights • The right to elect the directors of the corporation by vote constitutes the most important control device of shareholders. (more in a minute – share classes) • Directors are elected each year at an annual meeting by a vote of the holders of a majority of shares who are present and entitled to vote. – The exact mechanism varies across companies. • The important difference is whether shares are to be voted cumulatively or voted straight. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 19. 15- Cumulative versus Straight Voting • The effect of cumulative voting is to permit minority participation. 1 +1 = win N+1 – Under cumulative voting, if there are N directors up for election, then 1/(N+1) percent of the stock plus one share will guarantee you a seat. – With cumulative voting, the more seats that are up for election at one time, the easier it is to win one. • If there are 4 seats up for election, then 1/5=20% of the shares will ensure a seat • If there are 19 seats up for election, then 1/20=5% of the shares will ensure a seat McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 20. 15- Cumulative versus Straight Voting • Straight voting works like a political election . – Shareholders have as many votes as shares and each position on the board has its own election. – A tendency to freeze out minority shareholders. – Small shareholders just don’t have the votes to get things done McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 21. 15- Cumulative vs. Straight Voting: Example • Imagine a firm with two shareholders : Mr. MacDonald and Ms. Laurier. – Mr. MacDonald owns 60% of the firm ( = 600 shares) and Ms. Laurier 40% ( = 400 shares). – There are three seats up for election on the board. • Under straight voting, Mr. MacDonald gets to pick all three seats. He can vote 600 votes for each candidate. • Under cumulative voting, Ms. Laurier has 1,200 votes ( = 400 shares × 3 seats) and Mr. MacDonald 1,800 votes. – Ms. Laurier can elect at least one board member. (1/4=25%) McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 22. 15- Example Shareholders of the Unicorn Company need to elect seven new directors. There are 2 million shares outstanding. How many shares do you need to own to be certain that you can elect at least one director under: a) straight voting? b) cumulative voting? McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 23. 15- Straight Voting (need > ½) • You need more than half of the outstanding shares to guarantee a seat. • 2 million shares equals 2 million votes for each potential director; you need a million votes plus 1 to win a seat. • 7 directors means each shareholder get 1 vote per potential director per share, but they cannot pool the votes for one candidate McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 24. 15- Cumulative Voting • Under cumulative voting, each shareholder has 7 votes (one for each director). There are 14 million votes (7 x 2 million) when 7 directors are up for election. • With N shares, you can cast (N shares x 7) = 7N votes. This leaves (14,000,000 – 7N) votes to the remaining shareholders. • To ensure the election of a single director, you need more than 1/7th of these remaining votes: McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 25. 15- Cumulative Voting • 7N > (14,000,000 – 7N) / 7 => N > 250,000 shares • Therefore, you need at least 250,001 shares to guarantee a seat. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 26. 15- Cumulative Voting • The more intuitive way to look at this is that if there are 7 directors to be elected at 2 million shares worth of votes, then you need 1/8 x 2 million = 250,000 shares plus 1 worth of votes required to ensure a director is elected (1/(1+N)× # shares+1 share) • Thus, 250,001 shares = 1,750,007 votes. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 27. 15- Cumulative Voting • Suppose there are only two shareholders. • You own 250,001 shares and your opponent owns the remaining 1,749,999 shares. With 7 directors to be elected, you have 1,750,007 votes and he has 12,249,993 votes. • Since you can cast 1,750,007 votes for yourself, to preclude you from winning, your opponent must cast 1,750,008 votes. • If your opponent cast 1,750,008 votes for each of the first 6 candidates, he would have used up 10,500,048 votes, with only 1,749,945 votes left (12,249,993 –10,500,048). You have more votes than your opponent for the last director spot. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 28. 15- Proxy Voting • A proxy is the legal grant of authority by a shareholder to someone else to vote his or her shares. • For convenience, the actual voting in large public corporations is usually done by proxy, e.g. BCE Inc. • If shareholders are not satisfied with management, an outside group of shareholders can try to obtain as many votes as possible via proxy. • Proxy battles are often led by large pension funds like the Ontario Teachers’ Pension Board or the British Columbia Investment Management Corporation. • http://www.reuters.com/article/idUSTRE60643J20100107 • http://www.bce.ca/data/documents/ Proxy_Form2009_english.pdf McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 29. 15- Dividends • Unless a dividend is declared by the board of directors of a corporation, it is not a liability of the corporation. – A corporation cannot default on an undeclared dividend. • The payment of dividends by the corporation is not a business expense. – Therefore, they are not tax-deductible. • Dividends received by individual shareholders are partially sheltered by a dividend tax credit. (Appendix of Chapter 1) • The specific tax rules can change in time McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 30. 15- Classes of Shares • When more than one class of share exists, they are usually created with unequal voting rights. • Many companies issue dual classes of common stock. The reason has to do with control of the firm. – Amoako-Adu and Smith show that firms going public with dual classes of shares in Canada are often family controlled. • Lease, McConnell, and Mikkelson found the market prices of U.S. stocks with superior voting rights to be about 5- percent higher than the prices of otherwise-identical stocks with inferior voting rights. • A Wharton/Harvard study showed that dual-class share structure hinders corporate performance McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 31. 15- WHEN GOOGLE WENT PUBLIC • Issued a second class of shares to ensure that the firms founders and top executives maintained control. • Each of the class-B shares reserved for Google insiders would carry 10 votes, while ordinary class-A shares sold to the public would get just 1 vote. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 32. 15- THIS WAS DESIGNED... • to give specific shareholders voting control • unequal voting shares are primarily created to satisfy owners who dont want to give up control but do want the public equity market to provide financing. • In most cases, these super-voting shares are not publicly traded, and company founders and their families are most commonly the controlling groups in dual-class McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 33. 15- Hollinger International • Former CEO Conrad Black controlled all of the companys class-B shares • This gave him 30% of the equity and 73% of the voting power. • He ran the company as if he were the sole owner, exacting huge management fees, consulting payments, and personal dividends. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 34. 15- Hollinger International • Hollingers board of directors was filled with Blacks friends who were unlikely to forcefully oppose his authority. • Holders of publicly traded shares of Hollinger had almost no power to make any decisions in terms of executive compensation, mergers and acquisitions, board construction poison pills. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 35. 15- Magna • http://www.financialpost.com/news/Proxy+advisor +recommends+elimination+Magna+dual+class +share+structure/3152067/story.html McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 36. 15- However, one ‘class share’ company, • Berkshire Hathaway has consistently delivered great fundamentals and shareholder value. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 37. 15- 15.2 Corporate Long-Term Debt: The Basics • Interest versus Dividends • Is It Debt or Equity? • Basic Features of Long-Term Debt • Different Types of Debt • Repayment • Seniority • Security • Indenture McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 38. 15- Interest versus Dividends • Debt is not an ownership interest in the firm. Creditors do not usually have voting power. • The device used by creditors to protect themselves is the loan contract (i.e., indenture). • The corporation’s payment of interest on debt is considered a cost of doing business and is fully tax-deductible. Dividends are paid out of after-tax dollars. [vague from a SCF perspective] • Unpaid debt is a liability of the firm. If it is not paid, the creditors can legally claim the assets of the firm. – One of the costs of issuing debt is the possibility of financial failure. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 39. 15- Is It Debt or Equity? • Some securities blur the line between debt and equity. – Convertible debentures , warrants • Corporations are very adept at creating hybrid securities that look like equity but are called debt. – Obviously, the distinction is important at tax time. – A corporation that succeeds in creating a debt security that is really equity obtains the tax benefits of debt while eliminating its bankruptcy costs. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 40. 15- Comparison of Warrants with call options • Warrants are much like call options, and will often confer the same rights as an equity option and can even be traded in secondary markets. • Warrants ‘attach’ to debt and are ‘sweeteners’ that can be converted to equity. This debt is issued at a lower rate than comparable ‘straight’ debt. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 41. 15- However, warrants have several key differences: • Warrants are issued by private parties, typically the corporation on which a warrant is based, rather than a public options exchange. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 42. 15- However, warrants have several key differences: • Warrants issued by the company itself are dilutive. – When the warrant issued by the company is exercised, the company issues new shares of stock, so the number of outstanding shares increases. – When a call option is exercised, the owner of the call option receives an existing share from an assigned call writer (except in the case of employee stock options, where new shares are created and issued by the company upon exercise). – Unlike common stock shares outstanding, warrants do not have voting rights. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 43. 15- Basic Features of Long-Term Debt • The bond indenture usually lists – Amount of Issue, Date of Issue, Maturity – Denomination (Par value) – Annual/semi-annual Coupon, Dates of Coupon Payments – Security – Sinking Funds – Call Provisions • Features that may change over time – Rating – Yield-to-Maturity/Yield-to-Call – Market Price McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 44. 15- • http://reports.finance.yahoo.com/z1? b=1&cpl=-1.000000&cpu=-1.000000&mtl=-1&mtu =-1&pr=0&rl=-1&ru=-1&sf=c&so=a&stt=VA&tc= 1&yl=-1.000000&ytl=6.000000&ytu=-1.000000&y u=-1.000000 McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 45. 15- Remember... • Flexibility costs money • If the Company issues callable debt , then it has the option (embedded) to call the debt, thus it must pay more yield [yield to call calculations are important] • If the Company issues debt with a convertibility option, then the bondholder has the option to convert to common equity if the option is in the money. Thus, the Company can pay less yield. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 46. 15- Different Types of Debt • A debenture is an unsecured corporate debt, whereas a bond is secured by a mortgage on the corporate property. • A note usually refers to an unsecured debt with a maturity shorter than that of a debenture, perhaps under seven years. • Debentures and bonds are long-term debt, i.e., payable more than one year from the date they are originally issued. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 47. 15- Repayment • Bonds can be repaid at maturity or earlier through the use of a sinking fund. [an annuity of sorts] • A sinking fund is an account managed on behalf of the issuer by a bond trustee for the purpose of retiring all or part of the bonds prior to their stated maturity. • Debt may be extinguished before maturity through a call provision giving the firm the right to pay a specific amount to retire the debt before the stated maturity date. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 48. 15- Sinking Fund • The bond payment process has two components: – 1) payment of the interest (coupon) to the bond holder – 2) A contribution to a sinking fund that will accumulate to the redemption value for the issue • The sinking fund remains the property of the Company until it is paid to the bondholders McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 49. 15- YTC Issues – Reinvestment Risk • Ex: Consider two, 30-year bonds issued by equally credit-worthy firms. Assume Firm A issues a normal bond with a YTM of 7%, and Firm B issues a callable bond with a YTM of 7.5% and a YTC of 8%. On the surface, Firm Bs callable bond seems most attractive due to the higher YTM and YTC. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 50. 15- • Now, assume interest rates fall in five years so that Firm B could issue a normal 30-year bond at only 3%. What would the firm do? - It would recall its bonds and issue new bonds at the lower interest rate. – People that invested in Firm Bs callable bonds would now be forced to reinvest their capital at much lower interest rates. – In this example, they may have been better off buying Firm As normal bond and holding it for 30 years. • On the other hand, if rates stayed the same or increased, the investor would be better off with Firm Bs callable bond. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 51. 15- Reinvestment Risk • YTM will be obtained if coupons can be reinvested at YTM – So, if prevailing rates are lower then YTM then the YTM (theoretical) will not be attained • If the company calls the issue then the investor will have to invest that cash at lower prevailing rates – You get cash just when you want to not have it McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 52. 15- • http://www.businessweek.com/news/2010-06-13/ asian-junk-bonds-risk-calls-amid-biggest-debt-rally- this-decade.html McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 53. 15- Seniority • Seniority indicates preference in position over other lenders. • Some debt is subordinated . In the event of default , holders of subordinated debt must give preference to other specified creditors who are paid first. • Debt cannot be subordinated to equity. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 54. 15- Hierarchy of Claim 1. Bonds/Debtholders 2. Preferred Shares 3. Common Shares McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 55. 15- Security • Security is a form of attachment to property. – It provides that the property can be sold in event of default to satisfy the debt for which the security is given. – A mortgage is used for security in tangible property. For example, debt can be secured by mortgages on plant and equipment. Debentures are not secured by a mortgage. – If mortgaged property is sold in the event of default, debenture holders will obtain something only if the mortgage bondholders have been fully satisfied. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 56. 15- Indenture • The written agreement between the corporate debt issuer and the lender. • Sets forth the terms of the loan: – Maturity – Interest rate – Protective covenants Examples: - restrictions on further indebtedness, - a maximum on the amount of dividends that can be paid, - a minimum level of working capital. If a call provision exists, it let the holder know of exclusion to the call (time before the issue may be called) McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 57. 15- 15.3 Preferred Shares • Represents equity of a corporation, but is different from common stock because it has preference over common in the payments of dividends and in the assets of the corporation in the event of bankruptcy. • Preferred shares have a stated liquidating value . For example, CIBC “$2.25 preferred” translates into a dividend yield of 9% of the stated $25 value. [2.25/0.09=25] $ preferd = stated $ value %yield div • Preferred dividends are either cumulative or noncumulative. • Firms may have an incentive to delay preferred dividends, since preferred shareholders receive no interest on the cumulated dividends. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 58. 15- Preferreds are valued as a perpetuity. • A=R i • A=present value • R=periodic payment • i=periodic rate • Thus, the liquidating value is A McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 59. 15- Cumulative/Non-Cumulative • Most are cumulative • Thus, the foregone dividends will be paid in a later year • Dividend usually needs to be repaid before the common shareholders are paid a dividend • The holders may be provided with other incentives to not sell if the dividend is not paid (ex: voting rights) McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 60. 15- Is Preferred Stock Really Debt? • A good case can be made that preferred stock is really debt in disguise . – The preferred shareholders receive a stated dividend. – In the event of liquidation, the preferred shareholders are entitled to a fixed claim. • Some preferred shares have adjustable dividends. An example is the CARP (cumulative, adjustable rate, preferred); thus, not like debt; there are growth annuities) • In Canada, corporate investors have an incentive to hold preferred shares issued by other corporations, since 100% of the dividends they receive are exempt from income taxes. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 61. 15- The Preferred Shares and Taxes • In Canada, a tax loophole encourages corporations that are lightly taxed to issue preferred shares. • Low-tax companies can make little use of the tax deduction on interest. • They can issue preferred shares and enjoy lower financing costs since preferred dividends are significantly lower than interest payments. (lower risk) • There are several reasons beyond taxes why preferred shares are issued: – Regulated public utilities can pass the tax disadvantage McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 62. 15- The Preferred Shares and Taxes (continued) – Firms issuing preferred shares can avoid the threat of bankruptcy that might otherwise exist if debt were relied on. – Issuing preferred shares may be a means of raising equity without surrendering control. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 63. 15- 15.4 Patterns of Long-Term Financing • For Canadian firms, internally generated cash flow dominates as a source of financing. • Firms usually spend more than they generate internally—the gap is financed by new sales of debt and equity. • Net new issues of equity are dwarfed by new sales of debt. • This is consistent with the pecking order hypothesis. – Firms finance growth with: internal funds; sales of marketable securities; debt issue; equity issue – in that order • Leverage ratios for Canadian firms are considerably higher than they were in the 1960s. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 64. 15- The Long-Term Financial Gap Uses of Cash Flow Sources of Cash Flow (100%) (100%) Capital Internal cash spending flow (retained earnings plus Internal depreciation) cash flow 68.3% Financial + deficit Net working Short-term and capital plus Long-term debt External other uses and equity cash flow 31.7% McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited
    • 65. 15- 15.5 Summary and Conclusions • The basic sources of long-term financing are: – Long-Term Debt Bond – Common Stock Equity – Preferred Stock Equity • Common shareholders have voting rights, limited liability, and a residual claim on the corporation. • Bondholders have a contractual claim against the corporation. • Preferred stock has some of the features of debt and equity. • Firms need financing—most of it is generated internally. McGraw-Hill Ryerson © 2005 McGraw–Hill Ryerson Limited

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