2. Disclaimer
This is not intended to be a condensed outline of the course,
but simply what I took as key takeaways. In some courses
there are many areas discussed that aren’t contained in these
slides, as they are items I was already familiar with and didn’t
feel the need to document or felt they wouldn’t be useful to me
in my current career. I think of these as my “cheat sheet” of
material that can help me in my current & future roles and are
DRAFT…like Google’s Beta are subject to change – Matt
Crane
Boulton, Tom. (2011). Course presented on Applied Advanced
Corporate Finance. Miami University, Oxford & Cincinnati, OH.
3. Overview
• It’s all about maximizing shareholder value
– Choose projects with positive/largest NPV
– Choose capital structure that minimizes cost
of capital
• Separating ownership & management =
Agency Costs
4. Capital Budgeting
• Budgeting for long-term projects
– Find projects/investments
– Analyze them
• Payback period (cumulative), NPV (>0), IRR (>hurdle rate or if
NPV>0 using hurdle rate)
– Implement and report results
• All projects should consider:
– Time value of $
– Risk
– Cash flows
– Ranking of competing projects
– What project(s) will maximize shareholder value
5. External Equity
• IPO:
– Underwriter advises, buys, & resells offering
– Greenshoe option: underwriter can sell more shares if
oversubscribed
– Roadshow:
• Bookbuilding vs. Fixed Price vs. Auction
– Spread: diff b/w underwriter and public prices
• Seasoned offering: additional offering of traded
firm
• Private placement: sell shares privately
6. External Debt
• International bonds:
– Eurobond: selling bond in country but not with that
currency
– Foreign bond:
• Eurobond – selling a dollar-denominated bond to investors in
Europe
• Foreign bond - Selling foreign currency-denominated bonds
in that country
– Why (top 3)?
• Hedging foreign operations
• Keep funds locally
• Favorable foreign tax treatments
7. Bond Terms
• Indenture: agreement
• Registered: company records show ownership (vs.
Bearer – coupons must be turned in)
• Accrued interest: interest earned since last payment
– Dirty price: includes accrued interest (European markets)
– Clean price: doesn’t include accrued interest (US markets)
• Sinking fund: retires par before maturity
• Putable bond: bondholder can demand payment
• Covenants: limitations by bondholders on the firm
• Debentures: long-term unsecured debt
• Convertible: converts into stock, etc
• CDS: contract/insurance against default
9. Stock Repurchases & Dividends
• Repurchases:
– Open market
– Tender offer to shareholders
– Dutch Auction
– Private negotiation (Green Mail)
• Dividends:
– Ex-dividend: holder before this date gets
dividend (2 days before)
10. M&A
• Horizontal, Vertical, or Conglomerate
• Buyers:
– Strategic
– Financial
• Sale:
– Private negotiation
– Controlled sale
– Auction
– Unsolicited expression of interest
• Bootstrap game: short-term boost in P/E
11. Private/Public Takeover Process
• Deal initiation
• Select deal advisors (investment bank/lawyers)
• Target contacts bidders (bidders get advisors)
• Confidentiality/Standstill
• Indications of interest
• Formal private bids
• Takeover agreement
• Takeover announcement
• Public bidding
• Approval of deal
• Deal completion
12. Takeover Methods & Defenses
• Methods:
– Proxy contest
– Acquisition
– LBO
– Management Buyout
– Merger
– Tender Offer
• Defenses:
– White Knight (friendly partner)
– Shark Repellent (amendments to charter)
– Poison Pill (actions taken by shareholders to thwart acquisition)
– Green Mail (premium paid to acquiror to call off bidding)
13. Restructuring
• Divestiture: sale of assets to outside party
• Spin-off: create new legal entity w/ shares
of entity going to parent shareholders as
dividend
• Equity Carve-Out: like spin-off but raises
cash for parent like divestiture
14. Bankruptcy Process
• Ch 11:
– File in federal bankruptcy court
– Appoint DIP/court trustee
– Develop/present reorg plan
– Accept reorg plan:
• Creditors: 2/3 of $ value + simple majority of each group
• Shareholders: 2/3 in each group
• Bankruptcy court: approve or can cram down
– DIP pays court-approved expenses
• Payouts (if liquidated and order of importance):
– Secured creditors
– Admin (lawyers, accountants, etc)
– Statutory (taxes, rent, unpaid wages, etc)
– Equity
