Account and finance

1. Chapter 13
Fundamentals of
Corporate Finance
Fourth Edition
An Overview of
Corporate
Financing
Slides by
Matthew Will
Irwin/McGraw Hill Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved

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Topics Covered
Creating Value with Financing
Common Stock
Preferred Stock
Corporate Debt
Convertible Securities
Patterns of Corporate Financing

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Common Stock
Treasury Stock
Stock that has been repurchased by the company
and held in its treasury
Issued Shares
Shares that have been issued by the company.
Outstanding Shares
Shares that have been issued by the company and
held by investors.

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Common Stock
Authorized Share Capital
Maximum number of shares that the company is
permitted to issue, as specified in the firm’s
articles of incorporation.
Par Value
Value of security
shown on certificate.
Retained Earnings
Earnings not paid out
as dividends.

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Common Stock
Book Value vs. Market Value
Book value is a backward looking measure. It
tells us how much capital the firm has raised from
shareholders 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.

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Common Stock
Example - H.J. Heinz Book Value vs. Market Value (1/2001)
Total Shares outstanding = 350 million
1,543
Value)
(Book
equity
common
Net
888
-
Other
2,908
-
cost
at
shares
Treasury
4,887
earnings
Retained
344
capital
in
paid
Additional
108
par)
($.25
Shares
Common

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Common Stock
Example - H.J. Heinz Book Value vs. Market Value (1/2001)
Total Shares outstanding = 350 million
billion
$14.0
Value
Market
350
x
shares
of
#
$40/sh
=
price
Market
2001
January

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Common Stock
Corporate Equity Holdings
Mutual Funds
19%
Pension Funds
21%
Insurance
Companies
7%
Rest of World
11%
Households
39%
Other
3%

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Preferred Stock
Preferred Stock - Stock that takes
priority over common stock in
regards to dividends.
Net Worth - Book value of common
shareholder’s equity plus preferred
stock.
Floating-Rate Preferred - Preferred
stock paying dividends that vary with
short term interest rates.

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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.

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Corporate Debt
Prime Rate - Benchmark interest rate charged by
banks.
Funded Debt - Debt with more than 1 year
remaining to maturity.
Sinking Fund - Fund established to retire debt
before maturity.
Callable Bond - Bond that may be repurchased by
firm before maturity at specified call price.

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Corporate Debt
Subordinate Debt - Debt that may be repaid in
bankruptcy only after senior debt is repaid.
Secured Debt - Debt that has first claim on specified
collateral in the event of default.
Investment Grade - Bonds rated Baa or above by
Moody’s or BBB or above by S&P.
Junk Bond - Bond with a rating below Baa or BBB.

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Corporate Debt
Eurodollars - Dollars held on deposit in a bank
outside the United States.
Eurobond - Bond that is marketed internationally.
Private Placement - Sale of securities to a limited
number of investors without a public offering.
Protective Covenants - Restriction on a firm to
protect bondholders.
Lease - Long-term rental agreement.

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Convertible Securities
Warrant - Right to buy shares from a company at a
stipulated price before a set date.
Convertible Bond - Bond that the holder may
exchange for a specified amount of another
security.
Convertibles are a combined security, consisting of
both a bond and a call option.

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Patterns of Corporate Financing
Firms may raise funds from external
sources or plow back profits rather than
distribute them to shareholders.
Should a firm elect external financing, they
may choose between debt or equity sources.

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-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
%
of
total
sources
80
82
84
86
88
90
92
94
96
98
2000
Year
Sources of Funds
Net Equity Issues
Debt Instruments
Internal Funds
Patterns of Corporate Financing

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Debt Equity Ratios for Nonfinancial Corp
Sector
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
88 90 92 94 96 98 2000
Year
Long
Term
D/E
Ratio
D/E Book
D/E Market
Patterns of Corporate Financing

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Web Resources
www.federalreserve.gov/release/z1/current/data.htm
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