Ch 19 Toolkit Hybrid Financing

# Ch 19 Toolkit Hybrid Financing - A 1 2 3 4 5 6 7 8 9 10 11...

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4/11/2010 Chapter 19. Tool Kit for Hybrid Financing: Preferred Stock, Warrants, and Convertibles Problem A firm has sold 150,000 shares of \$100 par value perpetual preferred stock (the total issue is \$15 million). The preferred stock has a stated annual dividend of \$12 per share. What is the dividend yield? Par value = \$100 \$12 Dividend yield when issued = 12% If yield later changes to: 9% Then price changes to: \$133.33 Alcoa's Preferred Stock (AA-P is ticker) Alcoa's preferred stock has the following features: Dividend rate = 3.75% Par value = \$100 Preferred's observed market price = \$53.50 Preferred's market yield = 7.0% Alcoa's yield on LT debt = 8.1% Assumed tax rate for corporate investor = 34% After-tax return on bond to corporate investor = 5.3% 6.3% INITIAL MARKET PRICE OF A BOND WITH WARRANTS In this model, we will examine three sources of long-term capital: preferred stock, warrants, and convertibles. Preferred stock is a hybrid security that represents a cross between debt and common equity. Warrants are derivative securities used by firms. Lastly, convertible securities are hybrids between debt and warrants. PREFERRED STOCK (Section 19.1) Commonly, preferred stock has a par value of \$25 or \$100. A preferred dividend is indicated as a percentage of par, or as dollars per share. Since preferred stock pays a perpetual dividend, its value is derived as the preferred dividend divided by the cost of preferred stock. Preferred stock's dividend yield, like common stock is the dividend paid divided by the value of the stock. D PS = After-tax return on preferred stock to corporate investor =Preferred yield x [ 1 - (0.3 x T) ] = WARRANTS (Section 19.2) A warrant is a certificate issued by a company which gives the warrant holder the right to buy a stated number of shares of the company's stock at a specified price for some specified length of time. Such warrants are called long-term call options, because they offer investors the opportunity to buy the firm's common stock at a fixed price, regardless of how high the stock may climb. This option offsets a low interest rate on a bond and can make a low-yield bond/warrant package more appealing to investors. A B C D E F G H I 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58

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Inputs Tax rate = 40% Price paid per bond with warrants = \$1,000 Total funds to be raised= \$50,000,000 Warrants per bond = 20 Number of years until bonds mature = 20 Interest rate on straight debt = 10% Coupon rate on bond with warrants = 8% Total number of bonds= 50,000 Total no. of warrants = 1,000,000 Price of the 8% coupon bonds without warrants N 20 I/YR 10% FV \$1,000 CPN PMT \$80 Price = \$829.73 A corporation decides to issue 20 year bonds to fund a \$50 million expansion. If they were to issue a straight bond package, the bonds would carry a 10% coupon rate, however the current bond proposal calls for an 8% coupon and stock warrants.
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## This note was uploaded on 06/11/2011 for the course FIN 5560 taught by Professor A during the Spring '11 term at Nova Southeastern University.

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Ch 19 Toolkit Hybrid Financing - A 1 2 3 4 5 6 7 8 9 10 11...

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