Project Management
Fiche : Project Management. Rechercher de 53 000+ Dissertation Gratuites et MémoiresPar bchampet • 9 Avril 2018 • Fiche • 5 729 Mots (23 Pages) • 745 Vues
CORPORATE FINANCE II - LECTURE 1
Financing decisions:
- More complicated due to the wide variety of securities
- Face more intense competition in financial markets
- Sometimes easier as they don’t have the finality that investment decisions have
Sources of financing for companies:
- Retained earnings (internal)
- Equity (external)
- Debt (external)
Gap between money needed and cash generated internally = financial deficit
Basic financing:
- How much profit should be retained rather than paid out as dividends? (Dividend policy)
- What proportion of deficit should be financed by borrowing rather than equity issue? (Debt policy)
- What types of financial instruments are available? (Debt and equity instruments)
Debt VS. Equity: (between the two = hybrid)
Debt:
- Fixed claim
- High priority on cash flows
- Tax deductible
- Fixed maturity
- No management control
Equity:
- Residual claim
- Lowest priority on cash flows
- No tax deductible
- Infinite life
- Management control
Equity:
- In very small businesses: owners investing their savings
- Slightly larger businesses: venture capital or private equity
- Publicly traded firms: common stock
Debt:
- Private businesses: bank loans
- Publicly traded firms: bonds
Par value: stated value on a stock certificate.
- An accounting value, not a market value
- Total par value (dedicated capital of the corporation) = nb of shares x par value of share
Authorized VS. Issued common stock:
- Authorized capital: all the capital we have within a company (nb of shares of common stock)
- Issued shares: authorized shares sold to and held by the shareholders of the company. Treasury stock is considered part of issued shares.
Capital surplus: (= paid-in capital) amounts of directly contributed equity capital in excess of the par value
- Cap. surplus = (IPO – PAR) x nb of shares
Retained earnings: (= reinvested earnings) the earnings that are not paid out as dividends, reflect all the earnings retained since incorporation of the company
Market and book value:
- Market value (= market capitalization) = price of stock x nb of shares outstanding
- Book value (= net common equity) = PAR value + Capital surplus + Retained earnings
Voting procedure:
- Stockholders elect directors by a majority voting system
- Stockholders can vote in person or appoint a proxy to vote
Classes of stock: in case company want/needs fresh capital but shareholders don’t want -> existing shares are labeled class A and the class B shares is issued to outside investors (with limited voting right and sell for less). Then classes A and B differ in their right to vote or receive dividends.
Preferred stock: equity of a corporation
- Different of common stock because:
- PS have a stated liquidating value (usually $100 per share)
- P dividends are paid after bond/bank interest but before ordinary dividends
- During bankruptcy, P shareholders are paid first before ordinary shareholders but after debt holders
- P dividends are not guaranteed and can either cumulative or noncumulative
- Advantages to the issuer:
- Dividend is optional
- Usually no voting rights
- Disadvantages to the issuer:
- Higher cost of preferred stock relative to debt financing
- Preferred dividends are not tax deductible
- PS could be:
- Participating (dividends increased when high profits)
- Redeemable (finite life, initial capital repaid)
- Convertible (into ordinary share at specified date and terms)
Corporate debt:
- If company in financial distress: right to default on debt and hand over on assets to the lenders
- Lenders have normally no voting power
- Interests are tax deductible (interests are paid before tax income: government provides tax subsidy on debt -> not provide on equity: dividends on common stock and PS are paid after tax income)
Patterns on corporate financing:
- 2 sources of cash for companies:
- Raise money from external source (issue of shares or debt)
- Retain part of profits (generally companies rely on internal funds with about 80% of capital covered by internal funds)
- Companies prefer internally generated funds:
- More convenient than external financing
- Cost of issuing securities is avoided
- Not held up to close scrutiny by potential investors and bankers
- Avoiding information asymmetry and signaling effect
Formulas:
- Common shares (par value) = Par value of each share x nb of shares
- Additional paid-up capital (= Capital surplus) = (IPO – PAR) x nb of shares
IPO = Cost of each share sold to public = Money raised by selling shares / nb of shares sold - Net common equity = Common shares + Additional paid-up capital + Retained earnings
- Market value (= market capitalization) = price of stock x nb of shares outstanding
- Book value = PAR value + Capital surplus + Retained earnings
CORPORATE FINANCE II – LECTURE 2
Venture capital: money invested to finance a new firm provided by specialist venture capital firms, wealthy individuals, investment institutions (e.g. pension funds).
- To convince VC to invest in your firm:
- Prepare a business plan which describes your product, potential market, production method, resources
- Place your savings in the business to signal you faith and commitment for success
- VC will:
- Structure the deal for strong incentive to work hard
- Provide funds in stages when deliverables are met
- 3 early stages of financing:
- Seed financing: capital provided at “idea” stage (generally < $100,000 and used for product dev. and market research provided by individuals or business angels)
- Start-up financing: capital used in product dev. and initial marketing (generally for company in operation for < 1 year with no sold products/services)
- First stage financing: capital provided to initiate manufacturing and sales (generally betw. $500,000 and $2m, case by case basis)
- 3 stages of expansion financing:
- Second stage financing (series A funding): capital used for initial expansion of company that already produced and sold product but with unprofitable revenue. Series A optimizes product, user base, develops business mode to generate long-term profit (raises betw. $2m and $15m).
- Third stage financing (series B & C funding): beyond dev. phase and into growing the business. Provided to fund major expansion (talent acquisition, plant expansion, product improvement, marketing) in profitable companies (betw. $7m and $10m)
- Mezzanine or bridge financing: capital provided for company expecting to go public in < 1 year
- Unique features of VC:
- VC firms are not passive investors (they provide on-going advice, recruit senior management team…)
- VC investments are highly illiquid (holding period betw. 3 to 7 years). VC capitalists may exit in 2 ways:
- Once new business established track record: sold out to larger firm
- Company may decide to go public and provide VC opportunity to cash out and original entrepreneurs in control
- VC markets can thrive only if an active stock market trades in young and rapidly growing firms
- V capitalists accept low probability of success (average rate of success 20-30%) and identify losers early and cut losses
Initial Public Offering of stocks (IPO): primary offerings where new shares are sold to raise add. capital for company
- Arranging a IPO:
- Select the underwriter (usually major investment and commercial banks): they act as financial intermediary: provide company with procedural and financial advice, buy the issue and resell to the public (earn spread)
- Prepare a registration statement for the approval of Securities and Exchange Commission (SEC) (presents info about proposed financing, firm’s history, existing business, plans for future).
- Prepare the prospectus for investors (with info of company, current shareholders, price, volume of IPO, how proceeds will be used, risks involved)
- Underwriter and company determine price and volume of issue
- Pricing the IPO: before settling price, underwriters may arrange “roadshow”: potential investors give their reactions and suggestions.
- Based on comparison of P/E ratios of competitors in same industry
- Discounted cashflow calculations
- Cost of IPO:
- Direct costs:
- Administrative for preparation of registration statement and prospectus
- Underwriter’s spread
- Indirect costs:
- Underpricing of IPOs
- Underprincing IPO: Underwriters prefer underprice IPO to be sure to sell everything
Seasoned Equity Offering: Issue of add. stock by a company whose stock already publicly traded. Needs to be approved by company’s Board of Directors.
- Costs of an SEO:
- Administrative costs
- Underwriting spread
- Market reaction to stock issues: decline in stock price (information asymmetry): managers know their stock is overvalued -> they issue new stocks to gain high price -> investors understand the technic -> they mark down the price accordingly
Private placements: Issues sold to no more than a dozen knowledgeable investors.
- Disadvantages:
- Investor can’t easily resell security. However most institutions (e.g. life insurance company) invest large amounts in corporate debt for long run –> less concerned about marketability)
- Advantages:
- Lower issuance costs than public issue
- Can be custom tailored for firms. Simpler if firm wishes to change terms of debt.
Difference costs IPO/SEO:
- Direct costs:
- Admin costs: SEO < IPO (listing fees, lawyers & accountants, marketing, distribution)
- Spread: SEO < IPO
- Indirect costs:
- Underpricing: SEO (no underpricing) < IPO
- Negative signals: SEO (overvalued) > IPO
Financing:
- Business angel
- VC
- Private equity
- IPO
- SEO
Formulas:
- Underpricing = ((Varrivée – Vdépart) / Vdépart) x100
- Cost of spread (= underwriter revenue) = price of share sold x nb of shares sold x percentage spread
- Total value of IPO = price of share sold x nb of shares sold
- Total cost of IPO = spread x total value of IPO
- Cost of IPO per share = spread x price of share sold
- Amount left (underpricing) = (closing price – initial price) x nb of shares sold
- Profit/Loss = price of share sold x nb of share sold – proceeds – out-of-pocket expenses
- Net funds raised = price of share sold x nb of share sold – cost of spread – administrative fees
- Break even percentage firm = Vinital / Vfinal
- Break even percentage VC = 100% - Break even percentage firm
CORPORATE FINANCE II - LECTURE 3
Fundamentals of debt finance:
- Corporate debt can short-term (< 1 year) or long-term
- Different from common stock:
- Creditor’s claim on corporation Is specified
- Promised cash flows
- Most are callable
- + Half of outstanding bonds are owned by life insurance companies & pension funds.
- Corpo. debt repayments take form of interest and capital payments of exotic compensations (commodities, shares)
- Debt finance is less expensive than equity finance because costs of raisings funds are lower and annual return required to attract investors is less than for equity
- Issuers of debt lowers the effective cost as interests are tax deductible
- Dangers:
- Creditors are often able to claim some/all of the assets of the firm if non-compliance with the terms of the loan (and company may be forced into liquidation)
- Security/collateral should be thought before a firm borrows capital. It can be inconvenient for company to grant bondholder on specific asset (firm will be limited in using the asset in future)
Types of debt:
- Plain vanilla/straight/bullet bonds: Regular, semi annual fixed coupons + specified redemption rate
- Zero coupons/deep discount bonds: No coupons + capital gain at maturity
- Variable-rate/floating-rate coupons/floaters: Coupons payments adjusted according interest rate index (e.g. T-bill rate, LIBOR, inflation)
- Maturity: Corporate bonds that can have every maturity possible. Debt < 1 year are short-term debt (unfunded debt) and carried on balance sheet as current liability. Debt > 1 year are long-term debt (or funded debt)
- Repayment provisions: Long-term bonds commonly repaid in steady regular payments. Publicly traded bonds repaid via a sinking fund (each year, firm puts aside a sum of cash into a sinking fund then used to buy back the bonds. Reduces risks and secures repayment for investor)
- Seniority: Some debt are subordinated and if default, subordinated lender has junior claim and is paid after all senior creditors are satisfied
- Secured bonds: Secured by fixed or floating charge against firm’s assets
- Fixed charge: specific assets are used as security: if default can be sold and proceeds used to repay bondholders
- Floating charge: loan is secured on assets of company and company can use its assets as it wishes until default which crystallizes floating charge
- Default risk: seniority & security do not guarantee payment
- Country & currency: capital markets have few national boundaries and companies may borrow from abroad. Eurobonds are international bonds marketed internationally
- Public VS. Private placements: Publicly issued bonds are sold to anyone who wants and freely traded on securities markets. Private placed bonds are sold directly to small nb of institutional investors
- Protective covenants: Bondholders can protect their investments by imposing protective covenants on companies that ensure companies will use money properly and not take on unreasonable risks
- Sovereign debt (and debt issued by government agencies): often regarded as default free instruments. Governments and government agencies issue debt to finance public expenditures
The public issue of bonds:
- Procedure is similar to issuance of stock
- Indenture (specific to bonds): written agreement between borrower and trust company. It lists: amount of issue, date of issue, maturity, denomination (par value), annual coupon, dates of coupon payments, security, sinking funds, call provisions, covenants
Bond covenants: terms used to protect interests of bondholder in the indenture:
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