Financial Management

involves a combination of debt and equity

1)Public
2)Private
3)Eurobonds

two principle types. Loans from Financial Institiutions, such loans have a floating interest rate that is tied to a base rate. Private Placement of unregistered bonds sold directly to accredited investors. Less expensive to issue than public debt.

involvd selling SEC registered bonds directly to investors

face amount of the bond.

the interest rate paid on the face amount of the bond.

a bond payable in the borrower's currency but sold outside the borrower's country

1) Debt Covenants
2)Security Provisions
3)Methods of Payment

Both public and private debt agreements contain restrictions known as debt covenants. These allow lenders to monitor and control the activities of the firm.

specify actions the borrower cannot take. Such as sale of certain assets, or incurance of additonal debt.

specify what the borrower must do such as provide audited financial statements each year.

Debt may be secured or unsecured. Secured debt is what is pledged to bondholders in case of default.

a bond secured with the pledge of specific property. Propert or plant assets.

a bond secured by financial assets of the firm.

a bond that is not secured b the pledge of specific property. A general obligation of the firm. Such bonds can only be issued by firms with the highest credit rating.

a bond with claims subordinated to other general creditors in the event of bankruptcy of that firm. Bondholders receive distributions only after general creditors and senior debt holders.

A bond with interest payments that are contingent on the firm's earnings.

1)Serial Payments
2)Sinking Fund Provisions
3)Converson
4)Redeemable
5)A call feature

paid off in installments over the life ot the issue.

The firm makes payments into a sinking fund which is used to retire bonds by purchase.

the bonds may be convertible into common stock and this may provide the method of payment.

a bondholder may have the right to redeem the bonds for cash under certain circumstances.

the bonds may have a call provision allowing the firmto force the bondholders to redeem the bonds before maturity.

these types of bonds do not pay interest . Instead they sell at a deep discount from the face or maturity value. The return to the investor is the difference between the cost and the bond's maturity value.

the rate of interest paid on this type of bond floats with changes in the market rate

These bonds are registered in the name of the bondholder. Interest payments are sent directly to the registered owners.

these bonds carry very high risk premiums. Have resulted from leveraged buyouts or are issued by large firms in troubled circumstances.

international bonds that are denominated in the currency of the nation in which they are sold.

international bonds that are denominated in US dollars.

those that meet any of the follwoing conditions

1) the arrangement transfers ownership of the property to the lessee by the end of the lease.

2) The lease contains a bargain purchase option at the the end of the lease.

3) the lease term is equal to 75% or more of the estimated life of the leased property.

4) The present value of the minimum lease payments equals 90% or more of the fair value of the leased property at the inception of the lease.

treated as rental agreements. the lease payments are expensed as they incurred.

is a transaction in which the owner of the property, sells the property to another and simultaneously leases it back.

1)Common Stock
2)Preferred Stock
3)Convertible Securities
4)Spin Offs
5)Tracking Stocks
6)Venture Capital
7)Going Public
8)Employee Stock Ownership Plans
9)Going Private

an option to buy common stock at a fixed price for some period of time. Once bond is sold, the stock warrants may be sold seperately and are traded on the market

a hybrid security. Preferred shareholders are entitled to receive a stipulated dividend, and receive it before the divident paid to common shareholders.

if dividends are not declared in a given year, the amount becomes in arrears and the amount must be paid in addition to current dividends before common shareholders can receive a dividend.

Some preferred stock is redeemable at a specified date

pfd. stock may be convertible into common stock.

a small percentage of prefered shares are participating, which means they may share with common shareholders in dividends above he stated amount.

a small percentage of preferred shares have a floating rather than a fixed dividend rate.

when a security is initally issued, it indicates the number of shares tat the security may be converted into.

occurs when a public diversified firm seperates on of its subsidaries, distributing the shares on a pro rata basis to its existing stockholders.

a specialized equity offering that is based on the operations and cash flows of a wholly owned subsidiary of a diversified firm.

a pool of funds that is used to make actively managed direct equity investments in rapidly growing private companies. Funds may be instituionally managed.

firms often reward management and key employees with stock or stock options as part of their compensation. Designed to motivate management to focus on shareholder value

large amounts of debt are used to buy all or a voting majority fo the shares of stock outstanding.

1)Leverage
2)Cost of Capital
3)Cost of existing common equity
4)Cost of New common stock
5)Evaluating the cost of capital
6) Optimal Capital Structure

measures the degree to which a firm builds fixed costs into its operations.

% Change in operating income/% change in unit volume

measures the extent to which the firm used debt financing.

is equal to the interest rate of the loan adjusted for the fact that interest is deductible.

determined by dividing the preferred dividend amount by the issue price of the stock.

is greater than that of debt or preferred equity because common shareholders assume more risk.

method of estimating the cost of common equity.

involves adding a risk premium of 3 to 5% to the interest rate on the firm's long term debt.

estimates the cost of common equity by considering the investors' expected yield on their investment.

defines the mix of debt, preferred, and common equity that causes the firm's stock price to be maximized.

1) Development Stage
2)Growth Stage
3)Expansion Stage
4)Maturity Stage

1)Legal Requirments
2)Cash Position
3)Access to capital markets
4)Desire for control
5)Tax Position of shareholders
6)Clientele effect
7)Investment Opportunities

payments to existing stockholders of a dividend but they are generally designed to reduce the stock's price to a target level that will attract more investors.

payment in the form of a dividend in the form of the firm's own stock.

firms will often repurchase some of their shares to have them available for executive stock options or acquisition of other firms.

markets in which newly issued securities are sold.

markets in which previously issued securities are sold.

a rising market

a declining market

commission agents of buyers or sellers

match buyers and sellers, but can and do take positions in the assets and buy and sell their own inventory

assist int the initial sale of newly issue securities by providing advice, underwriting.

financial instititutions that borrow one form of financial asset and distribute the asset in another form.

when a firm combines with another in the same line of business.

when a firm combines with another firm in the same supply chain.

when merging firms are somewhat related but not enough to make it a vertical or horizontal merger.

when the firms are completely unrelated.

a set of financial statements arise that is expected from the merger.

Applies a market determined multiple to some measure of earnings such as net income or earnings per share.