BADM 7090 IVB 2010 - Corporate Financing Policy (How Firms are Financed)

BADM 7090 IVB 2010 - Corporate Financing Policy (How Firms are Financed)

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BADM 7090 Financial Management Unit IV.B Corporate Financing Policy: How Firms are Financed Text material: GSM, Chs. 11, 16, D. Chance
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 2 of 38 Questions What sources do companies use for their long-term financing? What are the characteristics of these types of financial instruments? Note: This material is mostly qualitative
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 3 of 38 What are the Sources of Funds? Let’s assume a company needs funding for a long-term project? Possible sources: Sell existing assets Issue new debt Issue new equity Finance internally (corporate savings) We are interested in the implications of the last three sources (selling an existing asset is equivalent to a replacement or termination decision, which is more of a capital investment decision.)
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 4 of 38 The Breakdown of Corporate Financing Breakdown of Sources of Funds for U. S. Nonfinancial Corporations (This figure is an update of a graph from a previously used textbook. ) -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Internal funds Net equity issues Net borrowing **This page updated
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 5 of 38 The Breakdown of Corporate Financing(cont.) Aggregate Balance Sheet for Manufacturing Corporations in the U. S. (This table is an update of a figure from a previously used book.) (figures in $ billions) Current assets $2,099 Current liabilities $1,445 Fixed assets $2,782 Long-term debt $1,516 Less depreciation 1,481 Other long-term liabilities 1,128 Net fixed assets 1,301 Total long-term Other long-term liabilities 2,644 assets 3,812 Total assets $7,212 Stockholder's equity 3,123 Total liabilities and stockholder's equity $7,212 **This page updated
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 6 of 38 The Breakdown of Corporate Financing(cont.) Debt to Total Assets for Nonfinancial Corporations (This figure is an update of a figure from a previously used book.) 0 10 20 30 40 50 60 70 Book debt ratio Market debt ratio **This page updated
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 7 of 38 The Breakdown of Corporate Financing (corp.) Corporations seem to prefer internal funds Lower cost Avoids monitoring by the capital markets Avoids the implication of an announcement of new financing. We will talk about this more later. Although the book value of debt to assets has grown from about 28% to 40% since 1950, the market value has stayed about the same at 35%.
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 8 of 38 The Breakdown of Corporate Financing (cont.) Ratio of Debt to Debt plus Equity Across Countries (This figure is an update of a figure from a previously used book.) 0 10 20 30 40 50 60 70 80 Debt ratio, % **This page updated
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Version: 1/3/11 D. Chance – BADM 7090 – Unit IVB p. 9 of 38 Common Stock
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BADM 7090 IVB 2010 - Corporate Financing Policy (How Firms are Financed)

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