Unformatted text preview: FINC 202 2009 Lecture 24
Four slides on Shortterm Finance + Summary of Course + Test 2 1 Secured Financing Accounts receivable as Collateral
• Firm pledges debtors as security for loan Promissory Note • Bank evaluates debtors and lends 5090% of face value of “acceptable debtors” • Bank has recourse to firm if debtors default • Usually only available when large volumes of debtors involved • Potential problems of priority with other secured creditors 2 Inventory as Collateral
• Firm pledges inventory as security for shortterm loan • Lender evaluates marketability/perishability of inventory What if the inventory was fresh fruit as distinct from microwave ovens? • Lender usually advances up to 50% of book value of inventory • Potential problem of priority with other secured creditors 3 Floor plan (bailment) finance
• Supplier/lender holds title to inventory pending sale to customers • Method popular with goods that can be identified by serial no. eg. cars, appliances • Supplier/lender usually advances 80100% of cost of identified inventory • Complex form of finance lien filed and discharges on each item 4 Off Balance Sheet Financing Factoring accounts receivable
• Firm sells debtors to factor at discounted price • Debtors make payments to factor • Factoring can be withrecourse or nonrecourse to the firm If the factor cannot collect from a debtor • Discount represents factor’s charge for collection risk • Factoring usually an expensive form of shortterm finance 5 Looking back over where we have been Summary and Review 6 28% of the exam from here Topics Covered: Part ONE Weighted Average Cost of Capital Capital Structure Lectures 1, 2 and 3 Test ONE Q1 Dividend Policy Lectures 4, 5, 6 and 7 Test ONE Q2 and Assignment Lectures 8, 9 and 10 • + Share Splits, Bonus Issues, Share Buybacks Lecture 10 7 Test ONE Q3 Weighted Average Cost of Capital WACC %
MCC4 MCC3 MCC2 MCC1 About: Marginal Costs of Capital and Breakpoints MCC5 9.6 20 44 60 Funds $m
8 Weighted Average Cost of Capital
The cost of equity (retained earnings) could be calculated 1. by the SML equation rS = rRF + β ( rM − rRF )
1. or by the discounted dividend growth model D1 rS = + g P0 9 Weighted Average Cost of Capital Note that according the Efficient Markets Hypothesis (EMH) at equilibrium: rS SML METHOD = rS DISCOUNTED DIVIDEND METHOD However, generally the two methods will produce different values. The SML equation is the most widely accepted method for calculating rS . Preferred because it Is part of the CAPM • closely linked to OLS Regression Takes risk into account. • Shows the minimum rate of return acceptable • But both equations should work well with respect to WACC and the Tradeoff Model of Capital Structure 10 10 Weighted Average Cost of Capital The cost of new equity required the use of the discounted dividend model, with price adjusted for issuance costs D1 rS = P ( 1− F %) 0 + g 11 WACC and Capital Structure Miller and Modigliani, in developing their theory of capital structure produced two other formulae (with and without company tax)
• Covered in Lecture 6 But NOT generally used for calculating rS for WACC purposes. Because of too many restrictive assumptions. • For instance the nonexistence of financial distress This made it unusable in the FINC202 Assignment Debt rS = r0 + ( 1 − tC ) ( r0 − rd ) Equity 12 Capital Structure
We looked at this from two main perspectives: 1. Tradeoff Model
The threepart diagram required in both Test#1 and the Assignment is on the next slide But this diagram and the tradeoff model in general will not be in the exam 13 Cost of Capital % rs, rE WACC rd(1tC) WACC at minimum Debt as % of capital Structure Optimum Share Price $ Share Price Share Price at maximum Share price if no distress costs Optimum Debt as % of capital Structure 14 EPS in $$ Continued down from previous panel EPS Optimum Debt as % of Capital Structure
15 Capital Structure 1. • The Miller and Modigliani work on Capital structure. An important background • That provides a grounding for higherlevel courses covering capital structure But Miller and Modigliani formulae do not replace the SML (CAPM) • Miller and Modigliani material on capital structure will not be in the exam.
16 • 20% of the exam from here Topics Covered: Part TWO
A shorterterm view Ratio Analysis Lectures 11, 12 and 13 • TEST TWO Q2 Lectures 13 and 14 • TEST TWO Q4 and the Assignment Lectures 15 and 16 • TEST TWO Q3 Free Cash Flows, EVA and MVA Additional Funds Needed Model (AFN) 17 52% of the exam from here Part THREE: Current Asset Management & Funding Cash Conversion Cycle Topics Covered CA Management and Funding Policies Lecture 17 Inventory Management Lectures 18 ands 19 Accounts Receivable Management Lecture 19 TEST TWO Q1 and will not be tested again Lectures 20 and 21 Lecture 22 Cash Management Accounts Payable Management Negotiated Shortterm Debt Lectures 22 and 23 Lecture 23 and briefly today 18 Cross-linkages It has been one of the major roles of FINC202 to cover shortterm corporate financial management. The CCC and CA management policy material is core.
• The following just explore aspects of it at a lower, more technical level: The Inventory management Accounts Receivable management Cash management Accounts Payable management 19 Issues for Next year FINC354 (28 points) becomes: • FINC301 “Corporate Finance Theory and Policy” • FINC302 “Applied Corporate Finance” Both are in Semester 2 (15points each) FINC302 has a cap of 100 students • You are expected to do both – they are not alternatives • Please enrol sooner rather than later. Preenrolment is a necessary condition but NOT a sufficient condition for getting into the course.
20 Issues for Next year FINC203 is required as a prerequisite for most if not all 300level Finance courses.
• If you did not take this course in 2009 • Want to complete a major in Finance And …We suggest you get hold of the textbook and do some personal study over the summer. 21 ...
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- Spring '09
- Finance, Weighted average cost of capital