《财务管理基础》PPT课件.ppt

Chapter20 Long TermDebt PreferredStock andCommonStock AfterStudyingChapter20 youshouldbeableto Understandtheterminologyandcharacteristicsofbonds preferredstock andcommonstock Explainhowtheretirement repayment ofbondsandpreferredstockmaybeaccomplishedinanumberofdifferentways Explainthedifferencesbetweenvarioustypesoflong termsecuritiesintermsofclaimsonincomeandassets maturities securityholders rights andthetaxtreatmentofincomefromthesecurities Discusstheadvantagesanddisadvantagesofissuing buyingthethreedifferenttypesoflong termsecuritiesfromtheperspectiveofboththeissuerandinvestor Long TermDebt PreferredStock andCommonStock BondsandTheirFeaturesTypesofLong TermDebtInstrumentsRetirementofBondsPreferredStockandItsFeaturesRightsofCommonShareholdersDual ClassCommonStock BondsandTheirFeatures BasicTermsParValueCouponRateMaturityBondRatings Bond Along termdebtinstrumentwithafinalmaturitygenerallybeing10yearsormore TrusteeandIndenture Trustee Apersonorinstitutiondesignatedbyabondissuerastheofficialrepresentativeofthebondholders Typically abankservesastrustee Indenture Thelegalagreement alsocalledthedeedoftrust betweenthecorporationissuingbondsandthebondholders establishingthetermsofthebondissueandnamingthetrustee TypesofLong TermDebtInstruments Investorslooktotheearningpowerofthefirmastheirprimarysecurity Investorsreceivesomeprotectionbytherestrictionsimposedinthebondindenture particularlyanynegative pledgeclause Anegative pledgeclauseprecludesthecorporationfrompledginganyofitsassets notalreadypledged toothercreditors Debenture Along term unsecureddebtinstrument TypesofLong TermDebtInstruments Inthiscase subordinateddebentureholdersrankbehinddebentureholdersbutaheadofpreferredandcommonstockholdersintheeventofliquidation Frequently thesecurityisconvertibleintocommonstocktolowertheyieldrequiredbysubordinateddebentureholders oftenlessthanregulardebentures SubordinatedDebenture Along term unsecureddebtinstrumentwithalowerclaimonassetsandincomethanotherclassesofdebt knownasjuniordebt TypesofLong TermDebtInstruments Frequently thereisacumulativefeature whichprovidesthatanyunpaidinterestinaparticularyearaccumulates Thecumulativeobligationisusuallylimitedtonomorethanthreeyears Thebondsareunpopularwithinvestors usuallylimitedtoreorganizations butarestillseniortopreferredandcommonshareholdersintheeventofliquidation IncomeBond Abondwherethepaymentofinterestiscontingentuponsufficientearningsofthefirm TypesofLong TermDebtInstruments ThesearebondswitharatingofBa Moody s orlower Principalinvestorsarepensionfunds high yieldbondmutualfunds andsomeindividualinvestors Liquidityvariesdependingoninvestorsentiments Junkbondswereusedfrequentlyinthe1980sasameansoffinancingleveragedbuyouts LBOs JunkBond Ahigh risk high yield oftenunsecured bondratedbelowinvestmentgrade TypesofLong TermDebtInstruments Theissueissecuredbyalienonspecificassetsofthecorporation Themarketvalueofthecollateralshouldexceedtheamountofthebondissuebyareasonablemarginofsafetytohelpprotectbondholders MortgageBond Abondissuesecuredbyamortgageontheissuer sproperty TypesofLong TermDebtInstruments Ifthecorporationdefaults thetrusteecanforecloseonbehalfofthebondholders Thebondholdersbecomegeneralcreditorsforanyresidualamountafterthesaleofthecollateral Thecorporationmayhaveafirstmortgageandasecondmortgageonthesameassets Thefirstmortgagehasaseniorclaimontheassets MortgageBond Continued TypesofLong TermDebtInstruments Arailroadarrangeswithatrusteetopurchaseequipmentfromamanufacturer Therailroadsignsacontractwiththemanufacturerfortheconstructionofspecificequipment Whentheequipmentisdelivered equipmenttrustcertificatesaresoldtoinvestors EquipmentTrustCertificate Anintermediate tolong termsecurity usuallyissuedbyatransportationcompanysuchasarailroadorairline thatisusedtofinancenewequipment Letuslookatanexampleusingarailroad TypesofLong TermDebtInstruments Proceedsplustherailroaddownpaymentareusedtopaythemanufacturer Titleoftheequipmentisheldbythetrustee andthetrusteeleasestheequipmenttotherailroad Leasepaymentsareusedtopayafixeddividendtothecertificateholdersandtoretireaspecifiedportionofthecertificatesatregularintervals Afterthefinalleasepayment allcertificatesareretired titletotheequipmentpassestotherailroad EquipmentTrustCertificates Continued AssetSecuritization Purpose ToreducefinancingcostsFirmpicksassetsto package andusecashflowsAssetsremovedfromthebalancesheetandsoldtobankruptcy remoteentity special purposevehicle SPV SPVraisesmoneybysellingasset backedsecurities AssetSecuritization Theprocessofpackagingapoolofassetsandthensellinginterestsinthepoolintheformofasset backedsecurities Asset backedSecurity Debtsecuritieswhoseinterestandprincipalpaymentsareprovidedbythecashflowscomingfromadiscretepoolofassets RetirementofBonds Thecorporationmakesacashpaymenttothetrustee whichcallsthebonds Thecorporationpurchasesbondsintheopenmarketanddeliversthemtothetrustee SinkingFund Fundestablishedtoperiodicallyretireaportionofasecurityissuebeforematurity Thecorporationisrequiredtomakeperiodicsinking fundpaymentstoatrustee Twoformsforthesinking fundretirementofabond SinkingFundandtheRetirementofBonds Whenbondsarecalledforredemption thebondholderswillreceivethesinking fundcallprice Thebondsarecalledonalotterybasis bytheirserialnumbers andpublishedinperiodicalslikeTheWallStreetJournal Bondsshouldbepurchasedintheopenmarketifthemarketpriceislessthanthesinking fundcallprice SinkingFundandtheRetirementofBonds Volatilityininterestratesoradeclineinthecreditqualityofthefirmcouldlowerthemarketpriceofthebondandenhancethevaluetothefirmofhavingthisoption Bondholdersmaybenefitfromtheorderlyretirementofdebt amortizationeffect whichreducesthedefaultriskofthefirmandaddsliquiditytobondsoutstanding SinkingFundandtheRetirementofBonds Manybondissuesaredesignedtohavealargerfinalpaymenttopayoffthedebt Forexample acorporationmayundertakea 10million 15 yearbondissue Thefirmisobligatedtomake 500 000sinking fundpaymentsinthe5ththrough14thyears Thefinalballoonpaymentinthe15thyearwouldbefortheremaining 5millionofbonds BalloonPayment Apaymentondebtthatismuchlargerthanotherpayments SerialBonds Forexample a 10millionissueofserialbondsmighthave 500 000ofpredeterminedbondsmaturingeachyearfor20years Investorsareabletochoosethematuritythatbestfitstheirneeds widerinvestorappeal SerialBonds Anissueofbondswithdifferentmaturities asdistinguishedfromanissuewhereallbondshaveidenticalmaturities termbonds CallProvision Notallbondsarecallable Inperiodsoflowinterest hence lowcoupon rates firmsaremorelikelytoissuenoncallablebonds Whenabondiscallable thecallpriceisusuallyabovetheparvalueofthebondandoftendecreasesovertime CallProvision Afeatureinanindenturethatpermitstheissuertorepurchasesecuritiesatafixedprice orseriesoffixedprices beforematurity alsocalledcallfeature CallPrice Forexample thecallpriceforthefirstyearmightequalthebondparvalueplusone year sinterest Accordingtowhentheycanbeexercised callprovisionscanbeeitherimmediateordeferred Thecallprovisionprovidesfinancingflexibilityforthefirmasconditionschange CallPrice Thepriceatwhichasecuritywithacallprovisioncanbepurchasedbytheissuerpriortothesecurity smaturity ValueoftheCallPrivilege Thecallprivilegeisvaluabletothefirmtothedetrimentofbondholders Assuch bondholdersrequireapremiumforthisadditionalriskintheformofahigheryield Thegreaterthevolatilityofinterestrates thegreatertheprobabilitythatthefirmwillcallthebonds Thus thecall optionismorevaluableallelseequal Callable bondvalue Noncallable bondvalue Call optionvalue PreferredStock Atypeofstockthatpromisesa usually fixeddividend butatthediscretionoftheboardofdirectors PreferredStockandItsFeatures BasicTermsParValueDividendRateMaturity CumulativeDividendsFeature Forexample iftheboardofdirectorsomitsa 6preferreddividendfortwoyears itmustpaypreferredshareholders 12pershare 100parvalue beforeanydividendcanbepaidtocommonshareholders Thecorporationdoesnothavetomakeupthedividendevenifitisprofitable aslongasthefirmhasnoplanstopaydividendstocommonshareholders CumulativeDividendsFeature Arequirementthatallcumulativeunpaiddividendsonthepreferredstockbepaidbeforeadividendmaybepaidonthecommonstock ParticipatingFeature Preferredstockholdershaveapriorclaimonincomeandanopportunityforadditionalreturnifthedividendstocommonstockholdersexceedacertainamount A6 participatingpreferredissue 100par allowsholderstoshareequallyinanydividendinexcessof 6 A 7commondividendresultsinanextra 1dividendtotheparticipatingpreferredshareholders ParticipatingPreferredStock Preferredstockwheretheholderisallowedtoparticipateinincreasingdividendsifthecommonstockholdersreceiveincreasingdividends VotingRightsinSpecialSituations Preferredstockholdersarenotnormallygivenavoiceinmanagementunlessthecompanyisunabletopaypreferredstockdividendsduringaspecifiedperiod Ifsuchasituationpresentsitself theclassofpreferredstockholderswouldbeentitledtoelectaspecifiednumberofdirectors Anysituationinwhichthecompanydefaultsunderrestrictionsintheagreement similartobondindenture mayleadtovotingpowerforpreferredshareholders Preferredshareholderscannotforcetheimmediaterepaymentofobligations likedebtobligations RetirementofPreferredStock CallProvision almostallissuescarryacallprovisionbecauseoftheinfinitematurity Itisoftenacheapermethodofretirementthanopenmarketpurchases invitingtenders oranexchangeofsecurities SinkingFund likebonds manypreferredissuesprovideforthismethodofretirement Conversion certainissuesareconvertibleintocommonstockattheoptionofthepreferredstockholder Usedmostfrequentlyintheacquisitionofothercompanies thetransactionisnottaxabletotheshareholdersoftheacquiredfirm UseofPreferredStockinFinancing Thecorporateissuerusesirregularlybecausethepreferreddividendisnottaxdeductible Utilitiesusemorefrequentlyasthepreferreddividendcanbeaccountedforwhensettingcustomerrates Thecorporateinvestorisattractedtopreferredstockasgenerally70 ofdividendscanbeexcludedfromtaxes Moneymarketpreferredstock MMP isafloating ratepreferredstockwiththedividendratesetatauctionevery49days attractivetocorporations Flexibilityinpayingdividendsandaninfinitematurity similartoaperpetualloan aresignificantadvantagestothecorporateissuer Theafter taxcostofpreferredfinancingisgreaterthanthatoflong termdebtfinancingtothecorporateissuer CommonStockandItsFeatures BasicTermsAuthorizedSharesIssuedSharesOutstandingShares CommonStock Securitiesthatrepresenttheultimateownership andrisk positioninacorporation TypesofCommonStockValue Itismerelyarecordedfigureinthecorporatecharterandisoflittleeconomicconsequence Stockshouldneverbeissuedbelowparvalueasshareholderswouldbelegallyliableforanydiscountfromparifthefirmisliquidated Commonstockthatisauthorizedwithoutparvalue no parstock iscarriedonthebooksattheoriginalmarketpriceoratsomeassigned orstated value Thedifferencebetweentheissuingpriceandtheparorstatedvalueisadditionalpaid incapital A ParValue Thefacevalue ExampleofValue FunFinMan Inc Commonstock 1parvalue 100 000sharesissuedandoutstanding 100 000Additionalpaid incapital400 000Retainedearnings650 000Totalshareholders equity 1 150 000TheparvalueofFunFinMan Inc is 1pershare Thisvalueisnotlikelytochangeovertimefromnormalday to dayoperations TypesofCommonStockValue C LiquidatingValue pershare Thevaluepershareifthefirm sassetsaresoldseparatelyfromtheoperatingorganization Thisvaluemaybeless orgreater thanbookvalue Rarelyarethetwovaluesidentical B BookValue pershare Shareholders equity aslistedonthebalancesheet dividedbythenumberofsharesoutstanding ExampleofBookValue pershare FunFinMan Inc Commonstock 1parvalue 100 000sharesissuedandoutstanding 100 000Additionalpaid incapital400 000Retainedearnings650 000Totalshareholders equity 1 150 000Thebookvalue pershare ofFunFinMan Inc isdeterminedbydividingtotalshareholders equity 1 150 000 bythesharesoutstanding 100 000 whichyieldsabookvalueof 11 50pershare Thisvalueisnotlikelytochangeovertimefromnormalday to dayoperations TypesofCommonStockValue Thisvalueisusuallygreaterthanbookvalue pershare butcanoccasionallybelessthanbookvalue pershare forfirmsthathavebeen areorexpectedtobeinfinancialdifficulties Rarelyarethetwovaluesidentical Marketvalue pershare maybedifficulttoobtainfromthinlytradedsecurities D MarketValue pershare Thecurrentpriceatwhichthestockiscurrentlytrading TypesofCommonStockValue Typically thesharesofnewcompaniesaretradedintheover the counter OTC market wheredealersmaintainaninventoryofthestocktoprovideadditionalliquidity D MarketValue pershare continued RightsofCommonShareholders RighttoIncome entitledtoshareintheearningsofthecompanyonlyifcashdividendsarepaid viaapprovalbytheboardofdirectors RighttoPurchaseNewShares Maybe thecorporatecharterofstatestatutemayprovidecurrentshareholderswithapreemptiveright whichrequiresthattheseshareholdersbefirstofferedanynewissueofcommonstockoranissuethatcanbeconvertedintocommonstock VotingRights becausetheshareholdersareownersofthefirm theyareentitledtoelecttheboardofdirectors Twomethodsofvoting 1 inpersonor 2 byproxyProxy Alegaldocumentgivingoneperson s authoritytoactforanother VotingRights SECregulatesthesolicitationofproxiesandrequirescompaniestodisseminateinformationtotheirshareholdersthroughproxymailingsorviatheInterneteffectiveJuly2007 Mostshareholders ifsatisfiedwithcompanyperformance signproxiesinbehalfofmanagement Shareholdersaregenerallygeographicallywidelydispersed ProxyContest OccursusuallywhendisagreementbetweenmanagementandanoutsideorminoritypartyNon managementgroupwillregisteritsproxystatementwiththeSECandwilloftensendanalternativeproxyrequesttoshareholdersManagement duetocorporateresourcesandorganization isgenerallyfavoredtowineProxiesareexpectedtoprovideamorecost effectivemechanismfornon managementgroupstocommunicatewithshareholdersandpossiblyreducethemanagementadvantage VotingProcedures Pluralityvoting amethodofelectingcorporatedirectors whereeachcommonshareheldcarriesonevoteforeachdirectorpositionthatisopen thehighestvotecountwinstheopendirectorposition Doesnotconsider withheld or against votes Cumulativevoting amethodofelectingcorporatedirectors whereeachcommonshareheldcarriesasmanyvotesastherearedirectorstobeelectedandeachshareholdermayaccumulatethesevotesandcasttheminanyfashionforoneormoreparticulardirectors Theboardofdirectorsareelectedundereither VotingProcedures MajorityorModifiedPluralityvoting amethodofelectingcorporatedirectors whereeachcommonshareheldcarriesonevoteforeachdirectorpositionthatisopen amajorityofallvotescastmustbereceivedtobeelected CommoninEuropeandgainingpopularityduetoadvocacygroupsintheUnitedStatesMustreceiveamajorityof for plus against plus withheld votescastApproximatelytwo thirdsofS P500haveadoptedbyNov2007versusonly16 inFeb2006 Agrowingelectionmethod VotingProceduresExample Undermajority rulevoting Youmaycast100votes 1pershare foreachofthe9directorpositionsopenforamaximumof100votesperposition Undercumulativevoting Youmaycast900votes 100votesx9positions forasinglepositionordividethevotesamongstthe9openpositionsinanymanneryoudesire YouareashareholderofFunFinMan Inc Youown100sharesandthereare9directorpositionstobefilled MinimumVotestoElectaDirector Cumulative Forexample toelect3directorsoutof9directorpositionsatFunFinMan Inc 100 000votingsharesoutstanding wouldrequire30 001votingshares 100 000shares x 3directors 10 Totalnumberofvotingshares Specificnumberofdirectorssought Totalnumberofdirectorstobeelected 1 X 1 1 30 001shares MinimumVotestoElectaDirector Cumulative Noticethatslightlyover30 oftotalvotingsharesarenecessarytoguaranteetheelectionofthreeoftheninedirectorpositions lessthanamajority Managementcanreducetheinfluenceofminorityshareholdersbyreducingthenumberofdirectorsorstaggeringtheelectiontermsofdirectorssofewerpositionsareopenateachvote Reducingthenumberofdirectorsupforelectionfrom9to4wouldincreasethevotesnecessarytoelect3directorsto60 001shares twiceasmany Dual ClassCommonStock Thisisusedtoretaincontrolforfounders management orsomeotherspecificgroup Forexample 80 000sharesofClassAat 20 shareand200 000sharesofClassBat 2 share ClassAputsup80 ofthefunds butClassBhasover70 ofthevotes UsuallyClassBtakesalowerclaimtodividendsandassetsthanClassAforthisvotingcontrol Dual classCommonStock Twoclassesofcommonstock usuallydesignatedClassAandClassB ClassAisusuallytheweakervotingornonvotingclass andClassBisusuallythestronger