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Project Management

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Par   •  9 Avril 2018  •  Fiche  •  5 729 Mots (23 Pages)  •  745 Vues

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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:

  1. Business angel
  2. VC
  3. Private equity
  4. IPO
  5. 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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