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CLASS_03 - 1 Lecture 3 Financing FIN 463 Case Studies Josh...

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Unformatted text preview: 1 Lecture 3: Financing FIN 463: Case Studies January 26, 2012 Josh Pierce [email protected] 2 Financing Decision: Introduction β–‘ Firms finance using β—‹ Stocks β—‹ Bonds/Debentures/Notes β—‹ Preferred stock β—‹ Commercial Paper and ABCP 3 Financing Decision: Patterns Financing Decisions by US Non Financial Corporations β–‘ Firms spend 80% on fixed assets and 20% on Net Working Capital β–‘ 70-90% of this investment financed by internally generated funds β–‘ Firms prefer to issue debt before equity A pecking order of firm financing β—‹ Internal funds β—‹ Debt and then β—‹ Equity 4 β–‘ Represents investment made by owners of the firm β–‘ Has no special preference on dividend or in bankruptcy β–‘ Some terms β—‹ Authorized Vs Issued stock β—‹ Equity at par value β—‹ Capital Surplus β—‹ Retained earnings β–‘ Distinctions matter for tax and accounting purposes but not for financial projections Financing Decision: Stock - Overview 5 β–‘ Most Important Rights β—‹ Elect the board of directors β—‹ Vote in General Meetings β–‘ Classes of stock β—‹ Differ in voting rights β—‹ Example β—Š Class A – Greater voting rights β—Š Class B – Less voting rights Financing Decision: Stock - Rights 6 β–‘ Debt contract -> Rights of the lenders and obligations of borrower β—‹ Borrower to make timely interest and principal payments β—‹ If borrower defaults, lender can take over the borrower’s assets and recover his money β–‘ Puts restrictions on the borrower β—Š Further borrowing β—Š Maximum dividend that can be paid β—Š Minimum level of working capital β—Š On selling property Financing Decision: Long Term Debt 7 Financing Decision: Long Term Debt β–‘ Examples of covenants. β–‘ β€œThe revolving line of credit agreement and the series A and B senior notes contain dividend restrictions and certain covenants, including covenants related to subsidiary indebtedness, additional indebtedness, net worth, fixed charges, funded debt and leverage ratios. At January 31, the Company was in compliance with its loan covenants.” Cascade Inc. 10K 8 MAC?...
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CLASS_03 - 1 Lecture 3 Financing FIN 463 Case Studies Josh...

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