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Asignatura: dirección financiera, Profesor: , Carrera: Derecho + Administración y Dirección de Empresas, Universidad: UC3M
Tipo: Apuntes
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Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
Overview of Corporate Financing ^
Outline:
1.1 Capital budgeting1.2 Financing decisions
2.1 Financial markets2.2 Equity and Debt
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
1.1 Capital budgeting1.2 Financing decisions
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
What do firms do?
Cash flow scheme between the firm and financial markets: (1)^
External funds obtained from investors (2)^
Funds invested in the firm (3)^
Internal funds generated by the operational activities of the firm (4)^
Internal funds reinvested in the firm (5)^
Funds that remunerate investors^ Operatingactivities
Capitalmarkets
(2) (3)^
(4)
(1) (5)
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
Classifying the financing sources^
Internal funds: ^
Retained earnings
^
External funds: ^
Shares ^
Common shares ^
Preferred shares ^
Convertibles
^
Debt ^
Bonds ^
Bank loans ^
Leasings ^
Commercial paper ^
Lines of credit ^
Suppliers
Shares, bonds andcommercial paperare all securitiesand they require toissue a title.
Advantages of using internal funds:1.^
Availability: they do not requireauthorization from investors orissuing new securities
2.^
They do not affect the controlstructure of the firm Disadvantages of using internal
funds:
1.^
They are not free cash. Theseare funds that will not bedistributed to shareholders, sotheir reinvestment should offeran adequate return.
2.^
The willingness not to losecontrol of the company shouldnot lead the company to passup profitable investmentopportunities.
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.1 Financial markets2.2 Equity and Debt
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.1 Financial markets^ ^
Financial markets can be
classified (segmented) in different
ways
:
1.^
According to the moment in the life of the financial instrument;^ ^
Primary market (issues), and Secondary market (transactions)
According to the maturity of the financial instrument;^ ^
Long term and short term markets
According to the organization of the markets;^ ^
Stock market (electronic), and outcry market (hand-waving)
According to the moment when the transaction occurs;^ ^
Spot market, Derivatives market, Futures market
According to where the issue takes place.^ ^
Domestic market, international market
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.2 Shares ^
Shares are tradable financial securities.
Shares may be physical securities (paper is now rare) or electronicregistries.
Title of ownership
in the company
Shareholders have the following rights: ^
Entitled to receive dividends if the firm distributes them; ^
Preferential right to acquire new issues of shares if the share carries a subscription right; ^
Voting rights (not the preferred shares) ^
Choice of the managerial team; Firm’s statutory changes; Boardchanges; Major issues (e.g. mergers).
^
May
be entitled to the liquidation value of the firm:
Residual claimants (last in terms of priority);
^
Limited liability (if liquidation value is not enough to cover debts, shareholders are not required to cover the shortfall).
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.2 Types of shares^ Shares can be classified:
^
According to their rights: ^
Common shares:
dividends, liquidation, voting, preferential right to
acquire new shares. ^
Preferred shares
: higher dividends and preferential treatment
Convertible securities:
Securities with an embedded option to be
converted into shares.
^
When new equity is being issued: ^
Old shares (pre-existing shares) ^
New shares
^
According to their historic performance: ^
Blue chips: shares from companies with big capitalization andliquidity that have done very well in the past ^
Speculative shares: from high risk companies with low capitalization
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.2 Types of shares^ Common shares^
Common shares issues: used to start a company or to increase thecapital of a company
Share Nominal Value
VS
Share price
Issued shares are registered at their
Nominal Value
(or Face Value)
Share price
:
Issue at par value: the share price is equal to the nominal value ^
Issue above par value (or at premium): share price at issue is greater than its nominal value ^
Issue below par value (or at a discount): share price is below face value
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
2.2 Types of shares^ Convertible securities^
They may be converted into shares, either by decision of its holderor of the issuing company, or both
They do not carry the same rights as shares, instead, they mayinclude some options like: ^
Rights issues: entitle the owner to acquire a pre-determinednumber of shares at a fixed price on or until a pre-determineddate. ^
Warrants: long-term call options to buy underlying shares of theissuer at a pre-specified price. ^
Convertible bonds: bonds which may be converted into shares.
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
Some definitions:
^
Authorized equity: maximum number of shares that can be issued (determined by shareholders or the companies’ statutes) ^
Shares issued: shares that are held by shareholders ^
Own shares: shares of the firm that have been repurchased by the firm, so not in the market. ^
Earnings before Interest and Taxes (
EBIT)
: income before interest and tax
expenses ^
Net earnings (
NE
) or Net income: income after interest and tax expenses
^
Dividends (
Div)
: share of the net earnings distributed to shareholders
2.2 Shares
2.2 Shares – Some relationships^ ^
^
^
^
t
t
t
t
t
t^
Div
NE
BVE
NE
Payout
BVE
BVE
−
=
−
=^
−
−^
1
1
*)
(^1) ( (^1) −
=
t t NE BVE
ROE
t
t^
NE
Payout
Div
=
t
t
t
t^
Div
NE
Payout
NE
−
=
−
=^
)
(^1) (
Earnings
Retained^ Departamento de Economía de la Empresa – Universidad Carlos III de Madrid
Dpto. Economía de la Empresa – Universidad Carlos III de Madrid
^
The authorized equity ofcompany GA is 100,000shares. The book value ofequity is as follows: ^
Common shares 40,000 €with face value 0,5€/share ^
Issuance premiums 10,000€ ^
Retained earnings 30,000 € ^
Own capital 80,000 € ^
Own shares (2,000 shr.)5,000€ ^
Book value of equity 75,000€
^
What is the number ofshares issued? ^
How many shares are therecirculating? ^
How many more shares canthe firm issue withoutpermission from theshareholders? ^
Suppose the firm issues10,000 shares at 2 € pershare. What items in thebalance sheet (ownershipinterests) would change?
2.2 Shares – Example 1
