UB MGF 401 - chap013 (15 pages)

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chap013



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chap013

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Pages:
15
School:
University at Buffalo, The State University of New York
Course:
Mgf 401 - Financial Institutions
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13 1 Types of Securities Equity Common stock Preferred stock Debt Commercial paper Debentures bonds Notes loans Bank financing line of credit term loan Hybrid Convertible McGraw Hill Irwin Debt Copyright 2007 by The McGraw Hill Companies Inc All rights 13 2 Common Stock Authorized Stock Number of shares of common stock that can be issued by the company Issued Shares Shares that have been issued by the company Outstanding Shares Shares that have been issued by the company and are currently held by investors Note treasury stock is shares that were issued and repurchased McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 3 Common Stock Authorized Shares Maximum number of shares that the company is permitted to issue as specified in the firm s articles of incorporation Par Value Issuance of Shares Value of security shown on certificate Note may be none Requires approval of board of directors and shareholders McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 4 Common Stock Book Value of Equity Par value Capital paid in excess of par Retained Earnings Treasury 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 The market value of the firm is forward looking it depends on the future value that shareholders expect to receive McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 5 Common Stock Example H J Heinz Book Value vs Market Value 4 2004 Total Shares outstanding 352 million Common Shares 25 par 108 Additional paid in capital 403 Retained earnings 4 857 Treasury shares at cost 2 928 Other 546 Net common equity Book Value 1 894 McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 6 Common Stock Example H J Heinz Book Value vs Market Value 4 2004 Total Shares outstanding 352 million April 2004 Market price 38 sh of shares x 352 Market Value 13 376 billion McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 7 Preferred Stock Preferred Stock Stock that takes priority over common stock in regards to dividends and liquidation Dividends Can be skipped at board s discretion Not a legal obligation that can lead to bankruptcy Cumulative v Noncumulative Floating Rate Preferred Preferred stock paying dividends that vary with short term interest rates McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 8 Corporate Debt Nonrecourse Debt If corporation does not pay its debt the shareholders do not have to put extra money into the corporation Instead the debtholders put company in bankruptcy and take over the assets Default Risk describes the likelihood that a corporation will not be able to pay its obligations Bond Ratings are issued on debt instruments to help investors assess the default risk of a firm McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 9 Corporate Debt Prime Rate Benchmark interest rate charged by banks Line of Credit Loan where amount borrowed varies through life of loan Callable Bond Bond that may be repurchased by firm before maturity at specified call price Sinking Fund Fund established to retire bond before maturity McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 10 Corporate Debt Subordinated Debt Debt that may be repaid in bankruptcy only after senior debt is repaid Secured Debt Debt that has first claim on specified collateral i e assets 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 McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 11 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 Is this debt McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 12 Convertible Securities Warrant Right to buy shares from a company at a stipulated price before a set date This is an option but not a requirement to buy shares Convertible Bond Bond that the holder may exchange for a specified amount of equity Convertibles are a combined security consisting of a bond and an option but not a requirement to convert McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 13 Patterns of Corporate Financing Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders Should a firm elect external financing they may choose between debt or equity sources McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 14 Sources of Funds McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights 13 15 Patterns of Corporate Financing McGraw Hill Irwin Copyright 2007 by The McGraw Hill Companies Inc All rights


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