Principles of

Corporate Finance
Chapter 14 Eighth Edition

An Overview of
Corporate
Financing
Slides by
Matthew Will

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 14- 2

Topics Covered
 Patterns of Corporate Financing
 Common Stock
 Debt
 Financial Markets and Institutions

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Patterns of Corporate Financing

 Firms may raise funds from external
sources or plow back profits rather than
distribute them to shareholders.
 Should a firm elect external financing, they
may choose between debt or equity sources.

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Patterns of Corporate Financing

120
Percent of total sources

100
80 Internal Funds
New Equity
60 New Debt
40
20

0
-20

-40
1989

1991

1993

1995

1997

1999

2001

2003
Year

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Patterns of Corporate Financing

Aggregate balance sheet for manufacturing corporations

in the United States, 2003 (figures in Billions).

Current assets $ 1,530 Current liabilities $ 1,213

Fixed assets 2,410 Long term debt 1,050
Less 1,272 Other long term 761
deprecication liabilities
Net fixed assets 1,138 Total long term liabilities 1,811

Other long term 2,310 Stockholders' equity 1,964

Total assets 4,978 Total liabilities and 4,978

stockholders' equity

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Patterns of Corporate Financing

? How do we define debt ?

Debt 1,213  1,811

  .61
Total assets 4,978

Long term liabilities 1,811

  .48
Long term liabilities  equity 1,811  1,964

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Patterns of Corporate Financing

80
68 67 65
70 64 63
62 61 59
Debt ratio. percent

60 57 57
53
48
50
40
30
20
10
0
Austria

Finland
USA

Spain
Portugal
Belgium
Japan
Denmark
Germany

Netherlands
Sweden

France

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 14- 8

Common Stock
Book Value vs. Market Value
Book value is a backward looking measure. It
tells us how much capital the firm has raised from
shareholders in the past. It does not measure the
value that shareholders place on those shares
today. The market value of the firm is forward
looking, it depends on the future dividends that
shareholders expect to receive.

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Common Stock
Example - Heinz Book Value vs. Market Value (4/2003)
Total Shares outstanding = 351 million

Common Shares ($1 par) 108

Additional paid in capital 377
Retained earnings 4,433
Treasury shares - 2,880
Other adjustments - 838
Net common equity (Book Value) 1,199

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Common Stock
Example - Heinz Book Value vs. Market Value (4/03)
Total Shares outstanding = 351 million

April 2003 Market price = $30/sh

# of shares x 351
Market Value $10.5 billion

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Holdings of Corp Equities (2004)

Rest of World Other

10.4 3.2 Households
36.8
Mutual
Funds, etc.
21.0

Insurance
Companies Pension
7.4 Funds
21.1

Percent of Holdings

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Preferred Stock
Preferred Stock - Stock that takes
priority over common stock in
regards to dividends.
Net Worth - Book value of common
shareholder’s equity plus preferred
stock.
Floating-Rate Preferred - Preferred
stock paying dividends that vary
with short term interest rates.

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Corporate Debt
 Debt has the unique feature of allowing the
borrowers to walk away from their obligation to
pay, in exchange for the assets of the company.
 “Default Risk” is the term used to describe the
likelihood that a firm will walk away from its
obligation, either voluntarily or involuntarily.
 “Bond Ratings”are issued on debt instruments to
help investors assess the default risk of a firm.

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Corporate Debt
TABLE 14-5 Large firms issue many different securities.
This table shows some of the debt securities on Heinz's
balance sheet in April 2003.

US dollar debt
Bank loans
Notes
Guaranteed Notes
Unsecured debentures
Revenue bonds
Remarketable securities
Eurodollar notes
Senior eurobonds

Foreign currency debt

Sterling notes
Euro notes
New Zealand dollar notes
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Corporate Debt
Prime Rate - Benchmark interest rate charged by
banks.
Funded Debt - Debt with more than 1 year
remaining to maturity.
Sinking Fund - Fund established to retire debt
before maturity.
Callable Bond - Bond that may be repurchased by
firm before maturity at specified call price.

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Corporate Debt
Subordinate Debt - Debt that may be repaid in
bankruptcy only after senior debt is repaid.
Secured Debt - Debt that has first claim on specified
collateral in the event of default.
Investment Grade - Bonds rated Baa or above by
Moody’s or BBB or above by S&P.
Junk Bond - Bond with a rating below Baa or BBB.

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Corporate Debt
Eurodollars - Dollars held on deposit in a bank
outside the United States.
Eurobond - Bond that is marketed internationally.
Private Placement - Sale of securities to a limited
number of investors without a public offering.
Protective Covenants - Restriction on a firm to
protect bondholders.
Lease - Long-term rental agreement.

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Corporate Debt
Warrant - Right to buy shares from a company at a
stipulated price before a set date.
Convertible Bond - Bond that the holder may
exchange for a specified amount of another
security.

Convertibles are a combined security, consisting of

both a bond and a call option.

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Holdings of Corp Debt (2004)

Households
Banks
14.3
Other 9.0
9.1 Pension
Funds
10.3

Rest of
World
18.9
Insurance
Mutual
Companies
Funds, etc.
26.6
11.7

Percent of Holdings

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Financial Markets

Money

Primary OTC
Markets Markets
Secondary
Markets
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Financial Institutions
Company

Obligations
Funds

Intermediaries
Banks
Insurance Cos.
Brokerage Firms
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Financial Institutions
Intermediaries

Obligations
Funds

Investors
Depositors
Policyholders
Investors
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Web Resources
Click to access web sites
Internet connection required

www.census.gov/csd/qfr

www.federalreserve.gov/releases

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