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LONG TERM FINANCING– DEBT AND EQUITYChapters 15, 20 and 21
Only need to know slides 1-15 forMidtermLong Term Financing – An IntroductionChapters 15, 20 and 212Long Term Financing - Debt and Equity
An Introduction - OutlineChapters 15, 20 and 21Long Term Financing - Debt and Equity3Internal and external financing inCanadaCommon stock.Features, shareholder rights, share classes.Long term debt.Preferred shares.
Financing New Projects -“Pecking Order” TheoryChapters 15, 20 and 21Long Term Financing - Debt and Equity4Firms prefer to finance with internally generatedcash flow rather than outside sources of funds.Canadian firms have historically financed about 2/3rds oftheir investment needs from internally generated cashflow.Firms adapt dividend policies to reflect their long termfinancing needs but because of fluctuations in a firm’scash flow, retained earnings might not be enough.If a firm has excess cash, it will tend to pay off debtbefore repurchasing shares.If external financing is needed, firms tend to issuefirst straight debt, then convertible debt, then equity.
Internal and External Financing forCanadian Firms, 1991-2009Chapters 15, 20 and 21Long Term Financing - Debt and Equity5-50,000-50,000100,000150,000200,000250,000internalfinancingTrustunitsCommonstocksPreferredstocksCor-poratebonds
Stock Performance Following Debt IssuesChapters 15, 20 and 21Long Term Financing - Debt and Equity6Impact of Securities Offerings and Bank Borrowing on theValue of the Firm’s Common Stock2-Day Abnormal Stock ReturnSmithJamesL&MConvertible preferred stock-1.44%Preferred stock-0.19%Convertible bonds-2.07%Public straight bonds-0.26%-0.11%Private placement of debt-0.91%Bank loan agreement1.93%0.61%New bank credit agreement-0.01%Revised bank agreement –favourable3.98%
Common ShareholdersChapters 15, 20 and 21Long Term Financing - Debt and Equity7Common shareholders are firm owners and residualclaimants.Common shareholders face limited liability.Shareholder rights:Right to share proportionally in dividends paid or in assets after allliabilities are paid.In theory, have control over operations of company (e.g. theright tovote at annual meetings).Right to share proportionally in any new stock sold when approvedby a board of directors.Right of transfer.Straight voting is one vote per shareCumulative voting is # votes = # shares held x # directors tobe voted.Provides for minority participation.
Features of Common StockChapters 15, 20 and 21Long Term Financing - Debt and Equity8Authorized versus outstanding shares.Contributed surplus versus retained earnings.Shares may have different classes of common stock:Different voting rights for insiders and outsiders.