14_Oheads

14_Oheads - Lecture Notes 14 Long-Term Financing...

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1 Lecture Notes 14 Long-Term Financing Stocks (equity) and bonds (debt) • Debt and equity are broad categories of firm liabilities. • Key distinguishing features of debt and equity are: i. whether asset yields are a legal obligation or discretionary ; ii. whether asset owners can vote to choose directors; iii. priority in sharing in liquidation values; and iv. the tax deductibility of payments to asset owners. • In practice, gradations of financial instruments are used: i. Common stock can have different voting rights . ii. Preferred stock that has precedence in payment of dividends and in liquidation has some “debt-like” features. iii. Long-term debt that is unsecured or subordinated has some “equity-like” features. iv. Debt that has interest conditional upon corporate income also resembles the discretionary dividend yield of equity.
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2 Table 1: Historical U.S. Financing Patterns (percent), 1991 to 2002 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Uses of funds Capital spending 96 77 74 72 66 80 71 83 81 89 87 98 NWC and other 4 2 32 62 83 42 02 91 71 11 3 2 Sources of funds Internal 109 88 88 85 77 87 79 79 74 74 79 97 External -9 12 12 15 23 13 21 21 26 26 21 3 New borrowing -14 7 8 22 31 23 35 45 37 38 26 8 New stock 5 5 4 -7 -7 -10 -13 -24 -11 -12 -5 -5 Figure 1: Sources of financing for U.S. industrial firms B BB B B B B B J J J J J J J J J J J J HH H H H H H H 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 -40 -20 0 20 40 60 80 100 120 Percent Year B Internal Financing J New Borrowing H New Stock Sources of Financing for U.S. Industrial Firms 1991-2002
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3 Trends in Financing Patterns (U.S. Industrial Firms) • Internally generated cash flow has dominated as a source of fi- nancing. • External financing has been dominated by borrowing. • From 1984-90 and again from 1993 on new issues of equity were negative as firms re-purchased stock. This was accompanied by increased borrowing until 2000.
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14_Oheads - Lecture Notes 14 Long-Term Financing...

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