20110515 principles of corporate finance part4


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20110515 principles of corporate finance part4

  1. 1. 1 Principles of Corporate Finance Part 4 Financing Decisions and Market Efficiency
  2. 2. 2 Financing Decisions and Markets Efficinecy Chapter13 Efficient Markets and Behaviral Finance Chapter14 An Overview of Corporate Finance Chapter15 How Corprations Issue Securities 
  3. 3. 3 Chapter13 Efficient Marktets and Behavioral Finance 13-1 We always come back to NPV 13-2 What is an efficient market? 13-3 The evidence against market efficiency 13-4 Behavioral finance 13-5 The six lessons of market efficiency
  4. 4. 4 13-1 We always come back to NPV •  In both investments and financing decisions,we end up computing net present value(NPV). •  The one difference is that the first cash flow is positive and the sequent flows are negative. NPV=amount borrowed -PV of interest payments -PV of loan payments •  It is more difficult to find positive NPV financing strategies than positive NPV investment strategies. →money never sleeps(more competitive) →efficient capital markets
  5. 5. 5 13-2 What is an efficient Market?
 random walk •  The prices of stocks and commodities seemed follow a random walk. •  It implies that the price changes are independent of one another. •  Today's price change gave investors almost no clue as to the likely change tomorrow.
  6. 6. 6 Three forms of market efficiency •  Weak market efficiency -It is impossible to make consistently superior profits by studying past returns.Prices wil follow a random walk. •  Semi strong market efficieny -Prices will adjust immediately to public information. •  Strong market efficiency -Prices reflects all the information that can be acquired by painstaking analysis of the company and economy.
  7. 7. 7 13-3 The evidence against market efficiency •  SInce 1926 the stocks of the firms with the lowest markets capotalizations have performed substantially better than those with the highest capitalizations. •  The earings announcement puzzle •  The new issue puzzle(the book to market ratio puzzle) •  Bubbles -The boom in Japanese stock prices and real estates -dot.com bubbles
  8. 8. 8 13-4 Behavioral Finance •  Investors' attitudes to risk →Prospect theory  (a)the value investors place on a particular outcome is determined by the gains or losses that they have made since the asset was acquired or the holding last reviwed. (b)investors are particularly averse to the possibility of even a very small loss and need a high return to compensate for it. •  limit to arbitrage -example of LTCM •  Incentive Problem and the subprime crisis -banks,credit rating agencies,and other financial institutions all had distorted incentives.
  9. 9. 9 13-5 The six lessons of market efficiency •  Lesson1:Markets have no memory •  Lesson2:Trust market prices •  Lesson3:Read the entrails •  Lesson4:There are no financial illusions •  Lesson5:The Do-it-yourself alternative •  Lesson6:Seen one stock,seen them all
  10. 10. 10 Chapter14 An overview of corporate financing 14-1 Patterns of corporate financing 14-2 Common stock 14-3 Debt 14-4 Financial markets and institutions
  11. 11. 11 14-1 Patterns of corporate financing •  Most of the cash is generated internally. →Internal cash flow makes up more than two-thirds of corproate financing in Germany,Japan,and the UK as well as U.S. •  How much do firms borrow? →In book value terms the debt ratio crept stedily upward until 1990. Booming stock prices until 1999 ensured that for many years the amount of long term debt grew less rapidly than the market value of equity. However, this trend reversed in the stock market declines of 2000-2003 and 2008.
  12. 12. 12 14-2 Common stock •  A corporation is owned by its common stockholders. •  They have residual cash flow rights and residual control rights of the company. Asset Debt Equity
  13. 13. 13 Holdings corporate equities by investors source:http://www.tse.or.jp/market/data/examination/distribute/ b7gje6000000508d-att/bunpu2009.pdf
  14. 14. 14 Various typs of equities •  Dual class shares and private benefits •  Partnerships •  Trusts and REITS •  Preferred stock
  15. 15. 15 14-3 Debt •  When companies borrow money,they promise to make regular interest payments and to repay the principal. •  Because lenders are not considered to be owners of firms,they do not nomally have any voting power. Asset Debt Equity http://www.boj.or.jp/research/wps_rev/rev_2010/data/rev10j19.pdf
  16. 16. 16 Holdings corporate bonds by investors 
 in Japan
  17. 17. 17 Each company issues reflects the financial manager's response to a number of questions 1.  Shuold the comapnay borrow short term or long term? 2.  Should the debt be fixed or floating rate? 3.  Should you borrow dollars or some currency? 4.  What promises should you make to the lender? 5.  Should you issue straight or convertible bond?
  18. 18. 18 14-4 Financial markets and institutions •  Financial Markets -primary markets: Corporations raise money by selling financial assets such as stocks and bonds. -secondary markets: A transfer of owership from one person to another. This has no effects on the company's cash,asset,or operations.
  19. 19. 19 The financial crisis of 2007-2009 •  Factors of the financial crisis q  Easy money policies adopted by the U.S. Federal Reserve and other central banks after collapse of the technology stock bubble in 2000. q  Large balance-of-payments surpluses in Asia economies •  influence of financial crisis q  Lehman's bankruptcy meant major losses for investors and other financial institutuions. →The investors and institutions now feared that new risks could be lurking in every balance sheet. q  Bailing out AIG cost the US. Tresury about $85 billion. →main causes of financial deficit problem
  20. 20. 20 The role of financial institutions Financial institutions act as financial intermediaries. •  The payment mechanism •  Borrowing and lending •  Pooling Risk If you want to know the role of financial intermediariews in detail, read "Gendai no kinyu nyumon"written by professor Ikeo
  21. 21. 21 Chapter15 How corporations issue securities 15-1 Venture capital 15-2 The initial public offering 15-3 Alternative issue procedures for IPOs 15-4 Securities sales by public companies 15-5 Private placements and public issues
  22. 22. 22 15-1 Venture capital 【The venture capital Market】 •  family funds •  bank loans •  angel investor •  corporate venture •  limited partnership,general partnership •  Nasdaq(specialize in trading the shares of young,rapidly growing firms)
  23. 23. 23 15-2 The initial public offering •  【The underwriters】 They act as financial midwives to a new issue. role:They provide the company with procedural and financial advice They buy the issue They resell it to the public •  【Arrangin an initial public offering】 regitration statement(登録届出書) prospectus(目論見書) •  【sale of stock】 road show institutional investors(managers of mutual funds and pension funds)
  24. 24. 24
  25. 25. 25 15-3 Alternative issue procedures for IPOs 【IPOs method】 Book building method: The underwriter builds a book of likely orders and uses this information to set the issue price. Open auction: Investors are invited to submit their bids,stating how many shares they wish to buy and price.The securities are then sold their to the highest bidders. 【types of auction】 discriminatory auction: Every winner is required to pay the price that he or she bid uniform price auction: Winner is required to pay the price of the lowest winning bidder
  26. 26. 26 15-4 Securities sales by public companies •  General cash offers(一般公募) The SEC's Rule 415 allows large companies to file a single regstration statement covering financing plans for up to three years into the future(shelf registration). •  Rights issues(株主割当増資)   Companies sometimes give their exiting shareholders the right of first refusal(privileged subscription,or rigth issues). In U.S: confined to closed end investment companies In Europe and Asia:common
  27. 27. 27 15-5 Private placements and public issues •  It could be avoid costly process,to register the issue with the SEC, by selling the securities by privately. •  【problem】 One of the draw backs of a private placement is that the investor cannot easily resell the security. •  【treatment】 There has also been an increasing volume of secondary trading in Rule 144A issues.
  28. 28. 28 Implications for the financial manager who must decide how to raise financing •  Larger is cheaper •  Watch out for underpricing •  The winner's curse may be a serious problem with IPOs •  New stock issues may depress the price •  Shelf registration often makes sense for debt issues by blue-chip firms.