Corporation 1

sources of financing

two
internal financing External financing
equity liabilities
shares and dividends bonds and interest

Bonds:-
are a form of interest bearing notes payable that obligate the issuing company to repay a stated amount
(variously referred to as the principal, nominal value, face amount, or maturity value) at a specified
maturity date.
‫ الحامله بالفوائد وتلتزم الشركه المصدره ان تسدد المبلغ المتفق عليه (ويسمي اصل المبلغ) في تاريخ‬note payable ‫السندات هو شكل من اشكال‬
‫االستحقاق‬

Maturities for bonds typically range from 10 to 40 years.

‫ سنه‬40 ‫ سنين الي‬10 ‫تاريخ االسستحقاق عادتا مايكون من فتره‬

In return for the use of the money borrowed, the company also agrees to pay interest to bondholders between
the issue date and maturity.
‫في المقابل الستخدام المبلغ المقترض من المستثمرين فأن الشركه ملتزمه بسداد فوائد لحاملي السندات في الفتره من االصدار الي االستحقاق‬

The periodic interest is a stated percentage of principal (variously referred to as the stated rate, coupon rate, or
nominal rate).
‫الفوائد الدوريه تكون نسمه محدده من اصل المبلغ‬

Ordinarily, interest is paid semiannually on designated interest dates beginning six months after the day the
bonds are "dated."
‫ شهور‬6 ‫الفوائد عادتا ما تكون كل‬

Bond Financing Advantages

1- Stockholder control is no affected:

Bondholders do not have voting rights, so current owners (stockholders) retain full control of the company.
‫التؤثر علي ملكيه الشركه الن حاملي االسهم ليس لهم حق في االداره فبالتالي المالكين للشركه له التحكم في الشركه‬

2- Tax saving result:

Bond interest is deductible for tax purposes; dividends on stock are not
‫توفر في الضرائب الن الفوائد علي السندات يتم خصمها من صافي الربح الخاضع للضريبه‬

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
3- Earnings per share may be higher: =
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑎𝑡𝑛𝑑𝑖𝑛𝑔
Although bond interest expense reduces net income, earnings per share on common stock often is higher under
bond financing because no additional shares of common stock are issued.
‫علي الرغم من ان الفوائد تقلل صافي المكسب ولكن مكسب السهم الواحد يكون عالي في حاله ان الشركه اصدره سندات‬
 Corporation 2

Example:-
Microsystems,Inc. is considering two plans for financing the construction of a new $5 million plant.

Plan A involves issuance of 200,000 shares of common stock at the current market price of $25 per share.

Plan B involves issuance of $5 million, 8% bonds at face value.

Income before interest and taxes on the new plant will be $1.5 million.

Income taxes are expected to be 30%.

Microsystems currently has 100,000 shares of common stock outstanding.

Solution
Plan A Plan B

Issue Stock Issue Bonds

Income before interest and taxes 1500,000 1500, 0000

- Interest (8% x 5000,000) 400,000

= Income before income taxes 1500,000 1100,000

- Income tax expense (30%) 450,000 330,000

= Net income 1050,000 770,000

Number of shares 100,000 + 200,000 = 300,000 100,000

Earning Per Share 3.50 7.70

𝑛𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 1050000 770,000

𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 100,000 + 200,000 100000
 Corporation 3

Types of bonds:- (Exam)

Secured and Unsecured Bonds:

Secured bonds have specific assets of the issuer pledged as collateral for the bonds.
‫هي سندات لها ضمان اصل للشخص المصدر‬

mortgage bond sinking fund bond

A bond secured by real estate A bond secured by specific assets set aside to retire
mortgage bonds ‫ لو الضمان يكون عقار يسمي‬the bonds
sinking fund ‫لو الضمان اصل معين يكون وديعه مثال تسمي‬
bond

Unsecured bonds, also called debenture bonds.

Companies with good credit ratings use these bonds extensively and most corporate bonds are debenture bonds.
debenture bonds ‫الشركات لديها نظام ائتماني جيد تسخدم هذه السندات وتسمي‬
No specific assets are pledged as security.
‫ال يوجد لديها نظام ضمانات‬
Investors in debentures usually have the same standing as the firm's other general creditors.
So in case of bankruptcy, debenture holders and other general creditors would be treated equally.
‫المستثمرين في هذه السندات لهم نفس خصائص الدائنون العاديين‬
‫في حاله االفالس حاملي السندات والدائنون يعاملوا نفس المعامله‬

Term and Serial Bonds:

term bonds. serial bonds.

Bonds that mature—are due for payment—at a single In contrast, bonds that mature in installments
specified future date serial bonds ‫ولو تم سداد المبلغ علي اقساط تسمي‬
‫سندات لها تاريخ استحقاق (ومستحقه السداد للمبلغ ككل في يوم‬
bonds ‫االستحقاق) في تاريخ محدد لمبلغ ال‬

Registered and Bearer Bonds:

registered bonds. bearer (or coupon) bonds
Bonds issued in the name of the owner are Bonds not registered are bearer (or coupon) bonds.
‫سندات تصدر بأسم صاحب السند‬ Holders of bearer bonds must send in coupons to
Interest payments on registered bonds are made by receive interest payments.
check to bondholders of record. coupon ‫او‬bearer ‫السندات التي التصدر بأسم تسمي‬
‫ستم سداد الفوائد كما هو متفق عليه في ميعاده عن طريق شيك‬ ‫ ليسلتم الفوائد‬coupon bonds ‫وحامل السند البد ان يرسل‬
bonds ‫لصاحب ال‬

Most bonds issued today are registered bonds.

registered bonds ‫معظم الشركات في الوقت الحالي تصدر‬
 Corporation 4

Convertible and Callable Bonds:

convertible bonds callable bonds
Bonds that can be converted into common stock at Bonds that the issuing company can retire at a stated
the bondholder’s option. dollar amount prior to maturity.
‫ تسمي‬bonds ‫لو السند اصدر علي اساس يمكن تقاعده بمبلغ متفق عليه في اي وقت السندات يتم تحويلها الي اسهم عاديه كأختيار لحامل‬
convertible bonds callable bonds ‫قبل ميعاد االستحقاق تسمي‬

The conversion feature generally is attractive to bond A call feature is included in nearly all corporate
buyers bond issues.
‫وخاصيه التحويل عادتا ما تجذب المستثمرين لشرائها‬ ‫وهذه الخاصيه تسمح للمستثمر باسترداد المبيغ في وقت قريب من‬
‫تاريخ االصدار‬

most corporate bonds are callable (or redeemable).

The call feature allows the issuing company to
buy back, or call outstanding bonds from
bondholders before their scheduled maturity date.
‫ الن هذه الخاصيه تسمح‬callable ‫معظم سندات الشركات تكون‬
‫للشركه المصدره ان تسترد السندات مره اخري قبل ميعاد ال‬
maturity date
This feature affords the company some protection
against being stuck with relatively high-cost debt in
the event interest rates fall during the period before
maturity.
‫هذه الخاصيه تسمح للشركات بأن توفر المبلغ الذي تقوم بسداده عند‬
‫االستحقاق وتوفر نسبه الفوائد المدفوعه قبل االستحقاق‬

The call price must be prespecified and often exceeds

the bond's principal amount (a call premium),
sometimes declining as maturity is approached.
‫سعر االسترداد يكون محدد مسبقا وال عادتا يكون ازيد من اصل المبلغ‬
‫االصلي‬
‫ويقل كلما تم الوصول لميعاد االستحقاق‬

The Bonds Issuing Procedure

- The face value is the amount of principal the issuing company must pay at the maturity date.
‫ وهو المبلغ التي الشركه البد ان تسدده في تاريخ االستحقاق‬-:‫اصل المبلغ‬
- The maturity date is the date that the final payment is due to the investor from the issuing company.
‫هو تاريخ اخر دفعه مستحقه للمتشمرين‬
- The contractual interest rate, often referred to as the stated rate, is the rate used to determine the amount
of cash interest the borrower pays and the investor receives.
‫ وهو نسبه تحدد حجم الفائده التي ستقوم الشركه بسدادها للمستثمرين‬-:‫نسبه الفائده‬
The principal: Is the par, face or maturity value of bond.
maturity value ‫ او‬face ‫او‬par ‫اصل المبلغ عادتا ما يسمي‬
The stated interest rate: Is in annual terms.
‫نسبه الفائده تكون دائما في المسأله سنويا‬
The time period: Is in a fraction of a year (i.e. 6/12 for semiannual payments).
6
‫الفتره (كنسبه من السنه) بمعني انه لو نصف سنوي تكون‬
12
 Corporation 5

Illustration 1: Assume that Acropolis Company on January 1, 2017, issues $100,000 of 9% bonds, due in
five years, with interest payable annually at year-end.

The purchaser of the bonds would receive the following two types of cash payments:
(1) principal of $100,000 to be paid at maturity, and

(2) five $9,000 interest payments ($100,000 x 9%) over the term of the bonds.

Required:- determine the issue price (selling price)

Solution

The current market price of a bond is equal to the present value of all the future cash payments promised
by the bond.

Present value of the principal 64,993

Principle x P.V. $1 (n= 5 i= 9%)
100,000 x 0.6499

+ Present value of the interest payments 35,007

interest x P.V. A (n= 5 i= 9%)
9,000 x 3.8897
Present value (selling price) of the bonds 100,000
Corporation 6
Corporation 7