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Sld16 LT Debt and Lease Fin
Sld16 LT Debt and Lease Fin
SIXTEEN
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 16-1
EDI TI ON
Figure 16-1
Interest coverage - Canadian non-financial corporations
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
EDI TI ON
Figure 16-2
Priority of claims
Secured debt
Senior
Junior
Unsecured debt
(debentures)
Senior
Subordinated
Lower priority
of claims
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Preferred stock
Common stock
McGraw-Hill Ryerson
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 16-3
EDI TI ON
Table 16-1
Corporate bond record (partial)
Air Canada
5.75% Subordinated Perpetual Bonds 1986
Issued:
SwF200,000,000
Jan. 1, 1986
Euro
O/S:
SwF200,000,000
Dec. 31, 1997
Interest:
5.75% (A)
Feb. 7
Redemption: Redeem. on Feb. 7, 1999 at SwF101.50 and at SwF102.00 every fifth year
thereafter on the interest payment date
Underwriter: Swiss Bank Corporation
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FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 16-4
EDI TI ON
Figure 16-3
Long-term yields on corporate debt
20
18
16
14
Percent
12
10
8
6
4
2
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0
1979
1982
1985
Source : Bank of Ca nada Re view, March 1999, F1 se rie s.
McGraw-Hill Ryerson
1988
1991
1994
1997
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Table 16-4
Outstanding debt issues, April 30, 1999
Issuer
Government of Canada
Government of Canada
Government of Canada
AA rating
Canadian Utilities
Canadian Utilities
Nav Canada
Nav Canada
A rating
Bombardier
Canadian Tire
Canadian Tire
BBB rating
Domtar
Domtar
Talisman
Cdn Occidental Petroleum
BB rating
Air Canada
B rating
Rogers Cable
Price
119.96
135.45
136.58
Yield to Maturity
5.13
5.24
5.44
8.430
11.400
6.600
7.400
Jun 01/05
Aug 15/10
Dec 01/06
Jun 01/27
115.16
146.06
106.24
119.78
5.46
5.78
5.58
5.94
6.400
5.650
12.100
Dec 22/06
Jan 16/06
May 10/10
103.91
99.85
150.09
5.76
5.68
5.86
10.350
10.850
9.800
6.300
Sep 01/06
Aug 15/17
Dec 22/04
Jun 02/08
106.97
125.77
113.57
94.39
7.50
8.12
6.85
7.15
6.750
Feb 02/04
100.50
6.62
8.750
July 17/07
104.00
8.07
Source: www.canpx.ca
McGraw-Hill Ryerson
FIF T H
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CANADIAN
EDI TI ON
Outflows (Costs)
1. Net cost of call
premium
. . . $1,000,000
2. Net cost of borrowing
expense on new issue
152,493
3. Duplicate interest
during overlap
period
. . .
20,000
Inflows (Benefits)
4. Cost savings in lower
interest rates
$1,720,488
$1,720,488
547,995
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
EDI TI ON
Table 16-5
Examples of Eurobonds
Amount
Outstanding
Currency
Rating Coupon Maturity ($ millions) Denomination*
A1
0.00%
Aaa 10.25%
Baa1 9.25%
Aa2 10.88%
Aa3 1.40%
Aa1 7.50%
2000
2001
2021
2001
2005
2003
100.0
200.0
300.0
200.0
300.0
100.0
DM
U.S.$
U.S.$
C$
Yen
N Z$
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 16-8
EDI TI ON
Table 16-8
Net present value of borrow-purchase
(1)
PV of
CCA
Shield
(2)
(3)
(4)
(5)
Payment
Interest
Tax
Shield
Aftertax
Cost of
(2)-(3)
Present
Value at 6%
1 . .. . . . . . . . . .
($1,319)
$500 x .4
$(1,119)
$(1,056)
2 . .. . . . . . . . . .
($1,319)
$418 x .4
(1,152)
(1,025)
3 . .. . . . . . . . . .
($1,319)
$328 x .4
(1,188)
(997)
4 . .. . . . . . . . . .
($1,319)
$229 x .4
(1,227)
(972)
5 . .. . . . . . . . . .
($1,319)
$120 x .4
(1,271)
(950)
Year
(5,000)
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Or
McGraw-Hill Ryerson
Cost of asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PV of CCA shield . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PV of borrowing alternative . . . . . . . . . . . . . . . . . . .
(5,000)
1,495
($3,505)
McGraw-Hill Ryerson Limited 2000
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT 16-9
EDI TI ON
Table 16-9
Net present value of operating lease outflows
Year
Payment
Tax
Shield
Aftertax Cost
of Leasing
Present
Value at 6%
0 . . . . . . . . $1,250
$ 0
$1,250
$1,250
1........
1,250
500
750
708
2........
1,800
500
1,300
1,157
3........
1,800
720
1,080
907
4........
1,800
720
1,080
855
5........
720
(720)
(538)
$4,339
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FIF T H
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Foundations of Financial
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Chapter 16 - Outline
LT 16-1
Bond Terminology
More Bond Terminology
Priority of Claims
Methods of Repayment
3 Types of Bond Yields
Other Forms of Bond Financing
Advantages and Disadvantages of Debt
2 Types of Leases
Advantages of Leasing
Lease vs. Borrow to Purchase (See PPT 16-8 and 16-9)
McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
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EDI TI ON
Bond Terminology
LT 16-2
Par Value:
Debenture:
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Foundations of Financial
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Priority of Claims
LT 16-3
Preferred Shareholders
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
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EDI TI ON
Methods of Repayment
LT 16-4
Principal at maturity:
FIF T H
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CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 16-5
FIF T H
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Foundations of Financial
Management
EDI TI ON
LT 16-6
McGraw-Hill Ryerson
FIF T H
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Foundations of Financial
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EDI TI ON
LT 16-7
Advantages of Debt:
interest payments are tax deductible to a firm
financial obligation is fixed
wise use of debt may lower a firms weighted average
cost of capital (WACC)
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Disadvantages of Debt:
interest and principal must always be met when due,
regardless of a firms financial position
agreements may restrict financial management in firm
poor use of debt may lower a firms stock price
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FIF T H
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CANADIAN
Foundations of Financial
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2 Types of Leases
LT 16-8
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Operating Lease:
a conventional rental agreement
firm doesnt expect to own property
is not shown on a firms balance sheet
ex., automobiles and office equipment
McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
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EDI TI ON
Advantages of Leasing
LT 16-9