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Unformatted text preview: Chapter 20 Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles Learning Objectives After reading this chapter, students should be able to: Define preferred stock, describe some of its basic features, identify and briefly explain other types of preferred stock discussed in the chapter, and identify preferred’s advantages and disadvantages. Characterize the various types of leases, discuss the financial statement effects of “off balance sheet financing,” perform the analysis necessary to make lease versus borrow-and-purchase decisions, and identify and briefly explain a few of the factors affecting leasing decisions. Discuss warrants and the way in which corporations utilize bonds with warrants as an alternative means of raising investment capital, describe how warrants are valued, calculate the component cost of bonds with warrants, and discuss the wealth effects and dilution due to warrants. Explain how convertible securities work, define the terms conversion ratio and conversion price, explain how they are valued, calculate the component cost of convertibles, and explain how convertibles affect the issuing firm’s capital structure. Identify differences between warrants and convertibles. Explain the three different ways to report earnings per share if warrants or convertibles are outstanding. Chapter 20: Hybrid Financing Learning Objectives 11 Lecture Suggestions This chapter discusses four types of hybrid securities: preferred stock, leases, warrants, and convertibles. We have mixed feelings about coverage of the chapter. On the one hand, we are tempted not to spend much time on it on the grounds that it gets into relatively technical analysis that would be better left for later courses. On the other hand, the material is important, and students who will not be taking further finance courses ought to be exposed to the subjects covered here. Also, leasing and warrants/convertibles are good subjects on which to lecture, as they contain a nice mix of new versus review material, and of quantitative versus qualitative analysis. Lease analysis serves as a good review of time value of money and risk/return analyses, and the warrants/convertibles analysis is a good review of valuation theory. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case solution for Chapter 20, which appears at the end of this chapter solution. For other suggestions about the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our classes....
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- Spring '11
- Depreciation, Hybrid Financing