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Long-Term Financing

Long-Term Financing. Professor XXXXX Course Name / Number. Common Stock and Long-Term Debt. Long-Term Financing. Common stockholders are residual claimants No claim to earnings or assets until all senior claims are paid in full High risk, but historically also high return.

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Long-Term Financing

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  1. Long-Term Financing Professor XXXXX Course Name / Number

  2. Common Stock and Long-Term Debt Long-Term Financing • Common stockholders are residual claimants • No claim to earnings or assets until all senior claims are paid in full • High risk, but historically also high return • Debt capital represents a legally enforceable claim • Equity capital

  3. Par value Denomination. Little economic relevance today Shares authorized, outstanding, and issued Maximum number of shares that can be issued Additional paid-in capital Amount received in excess of par value when corporation initially sold stock Common Stock

  4. Market capitalization • Market price/share x number shares outstanding Stock purchased on open market by corporation. Usually purchased for stock options Treasury stock Two-for-one split issues one new share for each already held. Done to reduce per share price Stock split Common Stock

  5. Book Value Of Stockholders’ Equity In IBM Source: IBM website (www.ibm.com /annualreport)

  6. Rights Of Common Stockholders • Voting rights of common stockholders can be exercised in person or by proxy. • Most US corporations have majority voting. Each share gives one vote for each director’s position. • Cumulative voting gives minority shareholders greater chance of electing one or more directors. Shareholders do not have a legal right to receive dividends.

  7. Preferred Stock Preferred stock is an equity claim, though fixed in amount. • Claim on assets and cash flow senior to common stock • As equity security, dividend payments are not tax deductible for the corporation and are subject to personal income tax. • For tax reasons, straight preferred stock held mostly by corporations. Promises a fixed annual dividend payment, but not legally enforceable; firms cannot pay common stock dividends if preferred stock in arrears. • Preferred stockholders usually do not have voting rights. • Venture capitalists an exception: they have control rights and receive board of directors seats.

  8. Short-term: Bills Maturity Intermediate-term: Notes Long-term: Bonds Only long-term debt is part of a corporation’s capitalization Seniority Rank in priority of claims to assets and cash flow. Senior versus subordinated debt Interest payment method Floating or fixed rate debt Methods Of Classifying Long-Term Debt

  9. Is debt secured by explicit collateral? Mortgages: secured by real estate Security Equipment trust receipts: secured by transportation equipment Firms could retire and reissue debt if interest rates fall. Callability Debentures: no explicit collateral Most US corporate debt is callable by firm. Methods Of Classifying Long-Term Debt

  10. Method of principal repayment Bullet loans: principal repaid in a lump sum at maturity Amortized loans: equal periodic principal and interest payments Capital market instruments:bonds, notes, bills are securities Security versus loan product Syndicated bank loans the most important loan products Methods Of Classifying Long-Term Debt

  11. Short-Term and Long-Term US Dollar Debt of IBM Source: IBM website (www.ibm.com /annualreport)

  12. Foreign Currency and Total Long-Term Debt Of IBM Notes:1 The weighted-average interest rates for commercial paper was 1.9% on December 31, 2001. 2 Values translated into dollars using exchange rate in force on December 31, 2001. Average interest rates in parentheses. Source: IBM website (www.ibm.com/annualreport)

  13. Basic Choices In Long-Term Financing Corporations face four key decision variables each year: • How much capital is needed for investment, other purposes? • How much capital to raise externally vs. internally? • Should external funds be raised on capital markets or via financial intermediaries? • Fraction of external capital as debt vs. equity? • Internal financing: cash flow from operations minus cash dividends • Amount not fixed: firm can vary dividends and capital structure Corporations are almost always net dissavers.

  14. Sources Of Funds For Non-Financial U.S. Corporations Source: Federal Reserve System data, reported in Statistical Abstract of the United States, various issues.

  15. Banks Are The World’s Largest Corporations—But Only By Assets Source: “Fortune Global 500: The World’s Largest Corporations”, Fortune (July 23, 2001)

  16. External Financing Patterns For G-7 Countries: Averages For 1984-1991 Source: Rajan and Zingales, “What do We Know About Capital Structure: Some Evidence from International Data,” Journal of Finance 50 (December 1995).

  17. Net External Financing, G-7 Countries: Average 1984-1991 Source: Rajan and Zingales, “What do We Know About Capital Structure: Some Evidence from International Data,” Journal of Finance 50 (December 1995).

  18. Annual Global Securities Issuance: Patterns Source: Investment Dealers’ Digest, various early January issues, 1991-2003. U.S. issuers account for two-thirds of total public issue volume. Debt issues are over three-fourths of US total every year. Equity issues play small financing role everywhere.

  19. Number And Value Of Worldwide Security Issues In 2002 1 Totals do not include privatizations or sovereign debt offerings. 2 Excluding Mortgage- and asset-backed securities or U.S. municipal bonds. Source: Investment Dealers’ Digest, January 6, 2003.

  20. U.S. Public Security Offerings, 2002 Source: Investment Dealers’ Digest, January 6, 2003.

  21. Law And Finance-Legal Systems Source: Rafael LaPorta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, “Legal Determinants of External Finance”, Journal of Finance 52 (July 1997), pp. 1131-1150

  22. Ownership Structure And Corporate Governance In Continental Europe Source: ‘Lean, Mean and European; A Survey of European Business,” The Economist (April 29, 2001), p.12

  23. Global Mergers and Acquisitions, 1991-2002 (US Dollar Billions) Source: Judy Radler Cohen, “M&A: Hoping for Recovery,” Investment Dealer’s Digest (January 14, 2002), pp. 29-43, and previous IDD issues

  24. Pension Funds And Capital Markets Source: The Economist (May 20, 2000), p.127

  25. Pension Funds And Capital Markets Source: The Economist (February 3, 2001), p.54

  26. Long-Term Financing Long-term financing instruments: common and preferred stock, debt Financial deficit: difference between firm’s total funding needs and internally generated cash flows Financial intermediaries are institutions that raise funds by selling claims on themselves Volume of security issues surged eight-fold in 11 years

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