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Introduction To Financial Management
Introduction To Financial Management
Corporate Financing
2. Financial instruments
2.1 Financial markets
2.2 Equity and Debt
(1)
(2)
(5)
❑ Finance economies;
■ 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
❑ Fiscal aspects:
■ Contrary to debt, dividend payments are not tax deductible
■ Fiscal advantage to some investors: companies that hold
preferred shares from other companies do have the right to
deduct a certain percentage of those dividends
❑ Retained earnings: The part of the net earnings (income) that is not
distributed as dividends.
❑ Earnings per share (EPS): Net earnings / number of shares
❑ Payout Ratio: proportion of earnings distributed as dividends
❑ Book value of equity (BVE): accounting value of equity
❑ Return on Equity (ROE): Earnings generated by every dollar/euro of
equity (book value)
❑ Market Capitalization: share price x number of shares issued (=
market value of equity).
Remark: market value of equity can be different from book value of equity!!
■ Dividends (Divt):
■ Retained earningst:
Questions:
Year t = 1 Year t = 2
BVEt-1 10
NEt
Divt
Retained Earningst
Year t = 1 Year t = 2
BVEt-1 10 10,8
NEt 2 2,16
2. Bearer or registered
❑ With bearer bonds the bondholder is not known to the firm. Whoever
holds the bond is entitled to the coupons and principal.
❑ Registered bonds (more common): the firm knows the names of the
holders of the bonds it issued.
■ Determine the value of the bond (this is the dirty price, quoted in Europe: the
price the buyer pays):
■ Determine the clean price of the bond (quoted price in the US):
■ Zero coupon bonds do not give any coupons ever. These bonds are usually
sold at a discount of their face value. Compute the yield of a zero coupon bond
with face value F=1000 euros on the 15/06/2020 that matures the 15/12/2020
and price at issue of 977 euros:
❑ Effective annual yield (rD) = ((1,000 / 977 )^(12 / 6)) -1 = 4.76%
■ Coupon bonds give interests regularly (coupons): consider a coupon bond with
a 5% coupon that is paid on March 15th every year, face value = 1000 euros,
actual date is 15/03/2000, and maturity 15/03/2003 and price 992.5 euros.
❑ Effective annual yield (rD ) = 5.28%
❑ Rules that define the access to funds, whenever the firm is in distress or
when it goes through liquidation.
❑ Debt can be senior or junior. Senior debt has priority over junior debt.
Only if senior debtors are paid in full will junior debtors receive any
funds.
Stocks Debt
■ In the case of debt issues, a private issue pays higher interests relatively
to a public issue.
The firm Alfa is looking to issue bonds with a 20 year maturity to raise
20 Million € (F). It’s presented with two alternatives:
Since 15,031,619.9 < 15,093,500.2, public is cheaper than private in this case.
■ Underpricing represents a high cost for firms and for the old shareholders
who forgo funds;
■ Equity offering underpricing is common in all markets and it is explained by
several reasons:
❑ Underwriters pressure: reducing issuance prices benefits insurers
because it reduces the likelihood that they might have to take up unsold
shares.
❑ Leaving a good taste: the likelihood of having further successful issues
increases if investors make profits out of the IPO.
■ Following an IPO, firms might need more funds and thereby issue more
shares or bonds.
■ After an IPO, there are other differences between public issues:
❑ Single issue: the firm prepares and makes a single issue.
❑ Seasoned issues: with a single registry and prospect the firm plans
several issues (very advantageous: lower costs for several issues, short
notice…).
❑ Open issue: issue that targets all investors.
❑ Rights issue: issue limited to existing shareholders. With rights issues,
the firm offers its shareholders options to buy new shares at an
attractive price.
🡪 Conclusion: Issuing shares with an issuance price lower than the market
price does not harm the shareholder value when there are subscription
rights.