lecture_securities_521_2011

lecture_securities_521_2011 - An Overview of Corporate...

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An Overview of Corporate Financing Topics Covered: Raising Capital Patterns of Corporate Financing Common Stock Preferred Stock Debt
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Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders (via dividends or share repurchases). Should a firm elect external financing, they may choose between debt or equity sources. Patterns of Corporate Financing
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Trends in Financing Sources of Funds for Investment for U.S. Nonfinancial Corporations (expressed as a percent of each year’s total investment) 1988 1989 1990 1991 1992 1993 Sources 1. Internal Funds 81 87 90 112 88 88 2. External Funds 19 13 10 -12 12 12 External Funds covered by: 3. Net Stock Issues -26 -27 -14 3 6 4 4. Net in Debt 45 40 24 -14 7 8
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Sources of Funds for Investment for U.S. Nonfinancial Corporations (expressed as a percent of each year’s total investment) 1994 1995 1996 1997 1998 1999 Sources 1. Internal Funds 86 78 89 86 84 83 2. External Funds 14 22 11 14 16 17 External Funds covered by 3. Net Stock Issues -7 -8 -9 -15 -32 -16 4. Net in Debt 21 30 20 29 48 33
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NOTES: Internal funds are net income plus depreciation less cash dividends paid to shareholders. SOURCE: Board of Governors of the Federal Reserve System, Flow of Funds Accounts. 2000 2001 2002 2003 2004 Sources 1.Internal Funds 104 90 95 93 88 2. External Funds -4 10 5 7 12 External Funds covered by: Net stock issues n/a -26 -19 -16 -47 Net debt increase n/a 36 24 22 58
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Observations on Past Financing Vast majority of investments paid for by cash generated internally Consistently 80-90% of investment financed by internal funds the past decade Almost every year gap between cash needed to finance investments and cash generated internally (financing gap) Substantial year-to-year variations in the way firms obtain external funds
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Why do firms rely so much on Internal Financing? Direct Costs of Financing (underwriters) Signaling – stock price effects Discipline of Capital Markets
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Financing: Private or Public? Advantages of Private Financing No registration with SEC No need to reveal confidential information Easier to renegotiate (dealing with one bank perhaps) Advantages of Public Financing Unlimited Investor Base Liquidity
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The Legal Environment Securities Acts of 1933 and 1934 require registration of all securities Description of firm and financial data Description of the security issued The agreement between the underwriter and the firm The underwriting syndicate
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lecture_securities_521_2011 - An Overview of Corporate...

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