FINANCIAL MGMT I
FINANCIAL MGMT I FINC 629
Popular in Course
Ms. Sidney Altenwerth
verified elite notetaker
Popular in Finance
This 8 page Class Notes was uploaded by Ms. Sidney Altenwerth on Wednesday October 21, 2015. The Class Notes belongs to FINC 629 at Texas A&M University taught by Staff in Fall. Since its upload, it has received 59 views. For similar materials see /class/225776/finc-629-texas-a-m-university in Finance at Texas A&M University.
Reviews for FINANCIAL MGMT I
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 10/21/15
Chapters 1720 Capital Structure There are 2 fundamental financing questions OHow to spend money 9 investment OHow to raise money 9 financing You ve learned about the asset side of the 88 Time to learn about the capital side A fundamental question 0 Can financing decisions affect firm value 0 What s the NPV of a loan NPV Loan Pmts PA it n Face PF l n Suppose the SBA gave you a 3 loan when the best rate available in the market is 7 0 NPV Loan Pmts PA it n Face PF l n 1000 30 PA1010 1000 PF1010 1000 30 PA1010 1000 PF1010 1000 570 430 Suppose that 70 rate Is the best available NPV Loan Pmts PA l39 n Face PF l39 n 1000 100 PA1010 1000 PF1010 1000 1000 000 Sometimes you might get lucky 0 Government subsidy 0 Stupid lender misjudges your creditworthiness and gives you a low interest rate 0 Stupid investors buy your stock when it is overpriced 0 Stupid investors sell back your stock when it underpriced 0 Stupid people leave money on sidewalk Don t count on it Nonetheless there s at least one clear benefit provided by IRS rules to debt interest payments TAX SHIELDS Principles for Maximizing Firm Value 0 Invest in projects that yield gt required rate 0 Choose financing mix to minimize required rate A BRIEF ASIDE You know about CAPITAL CONSTRAINTS What if there s money left over after you ve funded all the NPV investments available 0 Return the money to shareholders o Dividends o Repurchases What capital alternatives are available 0 Extremes of the spectrum Debt 6 Equity Debt characteristics E auitv characteristics Fixed claim Residual claim High priority to CFs Lowest priority of CFs Tax deductible Not tax deductible Fixed maturity Infinite life No voting rights No voting rights Is there anything else 7 Funny you should ask Capital Sources all sizes amp avors Commercial paper A promissory note issued by a large company to secure shortterm financing Bonds An interest bearing or discounted debt security Loans by the investor to the issuer in return for interest payments Debenture as opposed to secured debt A debt obligation that is not backed by collateral Investment grade A bond whose credit quality is considered to be among the most secure by any independent bondrating agency A rating of Baa or higher Moody s or BBB or higher SampP Highyield bonds Bonds that are rated as below investment grade The higher risk issuers of these bonds pay higher rates to compensate investors for the additional risk Zerocoupon bond These bond s coupon rate is zero Rather than paying interest on a periodic basis these bonds are issued at a fraction of their par value and increase in value as they approach maturity Also known as an accrual bond Callable bond Most corporate bonds have can be retired early if interest rates make refinancing attractive This option is valuable to the corporation so callable bonds pay a higher rate of interest and a premium above face value to the holder when called Yankee bonds Dollardenominated bonds issued in the US by foreign corporations banks and governments Convertible security A corporate bond or preferred stock that can be exchanged for shares of the firm39s common stock at a preset price or rate Preferred stock Preferred stock pays a dividend fixed percentage of par value on a regular schedule and is given preference over common stock in regard to the payment of dividends or liquidation of the firm Their prices tend to remain stable and generally have no voting rights Par value stock The nominal dollar amount assigned to a security by the issuer For an equity security par is usually a very small amount that bears no relationship to its market price except for preferred stock for which dividends are fixed of par Common stock A security representing partial ownership in a public or private corporation Each share of stock is a proportional stake in the corporation39s assets and profits and purchasing a stock should be thought of as owning a proportional share of the successes and failures of that business Generally one vote accompanies each share Underwriter A brokerage firm that helps a company come public in an initial public offering The firm underwrites vouches for the stock When a company has been brought public See Initial public offering Warrant An entitlement to purchase a certain number of shares of stock at a predetermined price usually higher than the current price for an extended period of time Typically warrants are offered with a bond issue or an IPO An example of a warrant might be the opportunity for an investor to buy 500 shares of ABC company for 50 until September 1 2004 Although the warrant accompanies a bond or actual IPO shares it trades separately after it is issued Securities and Exchange Commission SEC The Federal agency charged with ensuring that the US stock market is a free and open market All companies with stock registered in the United States must comply with SEC rules and regulations which include filing quarterly reports on how the company is doing The SEC headed by five appointed members was created under the Securities Exchange Act of 1934 Shelf Registration A registration of a new issue prepared up to two years in advance so the issue can be offered quickly as soon as funds are needed or market conditions are favorable American Depositary Receipt ADR A receipt for the shares of a foreignbased company held by a US bank that entitles the shareholder to all dividends and capital gains of the underlying stock ADRs trade similar to stocks on US exchanges and provide a way for Americans to invest in foreign based companies by buying their shares in the US instead of through an overseas exchange Debt has a distinct cost advantages over equity re gt rd gt rd1 t Why doesn t everyone use 100 debt Is there some cost associated with debt o If so that suggests an optimization problem 0 Trade off btwn the benefits amp costs of debt 0 What are these benefits amp costs Benefits of Debt 0 Tax shelter 0 Managerial disciplinine Costs of Debt 0 Bankruptcy costs 0 Agency costs Loss of future flexibility
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'