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Sources of Corporate Financing

Sources of Corporate Financing. Firms may raise funds from Internal sources by plowing back profits rather than distribute them to shareholders. Firm also use external financing. They may choose between debt or external equity sources. Sources of Funds. Types of Securities. Equity

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Sources of Corporate Financing

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  1. Sources of Corporate Financing • Firms may raise funds from Internal sources by plowing back profits rather than distribute them to shareholders. • Firm also use external financing. They may choose between debt or external equity sources.

  2. Sources of Funds

  3. Types of Securities • Equity • Common stock • Preferred stock • Debt • Commercial paper • Debentures • Guaranteed notes • Remarketable debt • Euro notes • Sterling notes • New Zealand dollar notes • Bank loans

  4. Common Stock Treasury Stock Stock that has been repurchased by the company and held in its treasury Issued Shares Shares that have been issued by the company. Outstanding Shares Shares that have been issued by the company and held by investors.

  5. Rights of Common Stockholders: • Dividend rights • Asset rights • Preemptive rights: preemptive right gives existing shareholders the right to purchase any new shares in proportion to their current holdings. • Voting rights: Stockholders have the right to vote at the annual meeting. Stockholders who do not attend the meeting may still vote by proxy. Proxies may be solicited by any party seeking to control the firm. A proxy fight occurs when an outside group solicits proxies in order to overthrow management and take control of the firm.

  6. Retained Earnings Earnings not paid out as dividends. Par Value Value of security shown on certificate. Common Stock Authorized Share Capital Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.

  7. Common Stock Book Value vs. Market Value Book value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that shareholders place on those shares today. The market value of the firm is forward looking, it depends on the future dividends that shareholders expect to receive.

  8. Common Stock Example - H.J. Heinz Book Value vs. Market Value (4/2004) Total Shares outstanding = 352 million

  9. Common Stock Example - H.J. Heinz Book Value vs. Market Value (4/2004) Total Shares outstanding = 352 million

  10. Preferred Stock Preferred Stock - Stock that takes priority over common stock in regards to dividends. Net Worth - Book value of common shareholder’s equity plus preferred stock. Floating-Rate Preferred - Preferred stock paying dividends that vary with short term interest rates.

  11. Corporate Debt • Debt has the unique feature of allowing the borrowers to walk away from their obligation to pay, in exchange for the assets of the company. • “Default Risk” is the term used to describe the likelihood that a firm will walk away from its obligation, either voluntarily or involuntarily. • “Bond Ratings”are issued on debt instruments to help investors assess the default risk of a firm.

  12. Corporate Debt Prime Rate - Benchmark interest rate charged by banks. Funded Debt - Debt with more than 1 year remaining to maturity. Sinking Fund - Fund established to retire debt before maturity. Callable Bond - Bond that may be repurchased by firm before maturity at specified call price.

  13. Corporate Debt Subordinate Debt - Debt that may be repaid in bankruptcy only after senior debt is repaid. Secured Debt - Debt that has first claim on specified collateral in the event of default. Investment Grade - Bonds rated Baa or above by Moody’s or BBB or above by S&P. Junk Bond - Bond with a rating below Baa or BBB.

  14. Corporate Debt Eurodollars - Dollars held on deposit in a bank outside the United States. Eurobond - Bond that is marketed internationally. Private Placement - Sale of securities to a limited number of investors without a public offering. Protective Covenants - Restriction on a firm to protect bondholders. Lease - Long-term rental agreement.

  15. Convertible Securities Warrant - Right to buy shares from a company at a stipulated price before a set date. Convertible Bond - Bond that the holder may exchange for a specified amount of another security. Convertibles are a combined security, consisting of both a bond and a call option.

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