LECTURE14

LECTURE14 - Lecture 14 Lecture Long-Term Financing Stocks...

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Lecture 14 Lecture 14 Long-Term Financing Long-Term Financing
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Stocks (equity) and Bonds (debt) Debt and equity are broad categories of firm liabilities. Key distinguishing features of debt and equity are : - Whether asset yields are a legal obligation or discretionary - Priority in sharing values in liquidation - The tax deductibility of payments to asset owners - Whether asset owners can vote to choose directors
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Stocks and Bonds (continued) Various financial instruments are also used in practice : Common stock can have different voting rights Preferred stock , that has precedence in payment of dividends and in liquidation, has some “debt-like” features Long-term debt, that is unsecured or subordinated , has some “equity-like” features Debt, that receives interest payment conditional on corporate income, also resembles the discretionary dividend yield of equity
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Internally generated cash flow has dominated as a source of financing, and the proportion of internal financing has grown. (Table 1) External financing has been dominated by borrowing. (Figure 1) During 1984-1990, new issues of equity were negative as firms repurchased stock, largely through increased borrowing. Internal financing tends to be higher in recessions or periods of slower growth in the economy (1979, 1982, 1991) Firms in the US use more internal financing than do firms in other comparable countries. (Figure 2) Nevertheless, during 1977-1992, the market value of firm’s equity increased more than 500% compared to only 350% for debt. Only firms in the US retired stocks in the 1980’s
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LECTURE14 - Lecture 14 Lecture Long-Term Financing Stocks...

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