Interest expense are cost

Dividend pay to share holders are not tax deductible

Callable bond should pay a higher interest rate at the beginning to compensate
for the provision call risky
YTM > coupon rate => bond price < par value
Shareholders have the right to vote for the board of directors and other
important issues: M&A.
Cumulative voting increases the likelihood of minority shareholders getting a seat
on the board.
Straight voting: 50% of the stock + 1 share.
Cumulative voting: 1/(N+1) percent of the stock + 1 share will guarantee a seat on
the Board. See Example 15.1 p.475 textbook.
Staggered voting.
Proxy votes are similar to absentee ballots. Proxy fights occur when minority
owners are trying to get enough votes to obtain seats on the Board or affect other
important issues that are coming up for the vote.
Different classes of stock can have different rights. Owners may want to issue a
nonvoting class of stock if they want to make sure that they maintain control of
the firm.

Stated value: preferred shares have a stated liquidating value.

There are a lot of features of preferred stock that are similar to debt. In fact,
many new issues have sinking funds that effectively convert what was a perpetual
security into an equity security with a definite maturity. However, for tax
purposes, preferred stock is equity, and dividends are not a tax-deductible
expense.

This is standard terminology in the U.S., but it may not transfer to other countries.
For example, debentures are secured debt in the United Kingdom.
Seniority: Senior debt vs. subordinated debt

Debenture: secured debt is less risky because the income from the security is
used to pay it off first.
Subordinated debenture: will be paid after the senior debt.
Bond without sinking fund: company has to come up with substantial cash at
maturity to retire debt, and this is riskier than systematic retirement of debt
through time.
Callable – bondholders bear the risk of the bond being called early, usually when
rates are lower. They don’t receive all of the expected coupons, and they have to
reinvest at lower rates.

Zero coupon => buy it with a much lower cost than par value, than when those
bond maturity, they receive the full of price bonds, and that will be their return.

Because inflation rate increase, coupon rate will adjusted in order to fit with the
inflation.
Income bonds – coupon payments depend on level of corporate income. If
earnings are not enough to cover the interest payment, it is not owed. Higher
required return
Convertible bonds – bonds can be converted into shares of common stock at the
bondholders’ discretion. Lower required return
Put bond – bondholder can force the company to buy the bond back before
maturity at a specified price (when market interest rate is high, because after
receive the return, investor can reinvest it for a higher interest rate). Lower
required return

Syndicated loans are always rated investment grade.

However, a leveraged syndicated loan is junk.
Some colourful names of foreign bonds: Samurai bonds, Yankee bonds, Bulldog
bonds.
Eurobonds: Currency = country of the issuer. Issued in (sold to) several markets
those countries are outside the country of issue
Foreign bond: currency = country where the bond is sold. It is issued (sold) in 1
country foreign issuer.
Net stock buyback = Stock buyback (stock repurchase) – Stock issue

M&M proposition II (with corporate tax)

 Rs increases with leverage, but the level of increase in Rs is lower than
compared to the case of no tax
S B
 Rwacc = B+ S × R s+ B+S × R B × ( 1−T C )

Rwacc decreases withleverage

Vu: value of unlevered firm

CFs paid to stockholders each year
= EBIT (1-Tc)
Perpetual CFs
PV of CFs paid to stockholders
EBIT (1−T c )
= V u= R0

Unlevered firm:
Total CFs paid to S/H: EBIT (1 – Tc)
 Levered firm:
CFs paid to S/H: (EBIT – B*Rb)*(1-Tc)
CFs paid to B/H: B*Rb

Total CF

Chap 17
When the borrow debt, there should be a conflict between debtholders and
shareholders
 Temptation: selfish strategies -> agency cost reduce firm value
 Wealth transfer from the debt holders to the stockholders
(*) Agency costs of debt is ≠ from Agency costs of Equity

(*) Agency costs of Debt:

1. Incentive to take large risks (Overinvestment: investment in negative NPV
project)
2. Underinvestment: Do not invest in some positive NPV projects
3. Milking the property:

The trade-off theory of Capital structure:

 There is a trade-off between the interest tax shield benefit of debt and
financial distress costs (bankruptcy costs)
 The firm pursues the optimal
Factors affect the target D/E ratio (optimal debt level)
1.Tax
* Highly profitable firms are in high tax bracket (high tax rate Tc) -> have high
interest tax shield benefit if we use more debt
* Those firm have low financial distress costs/bankruptcy costs. They should use
high target D/E ratio
2. Types of Assets:
3. Uncertainty of Operating income

CHAPTER 19:
Standard method of Cash Dividend:
Declaration date: the date the company decided to pay dividend, after this day,
dividend will become the obligation of the firm
Ex-Dividend date:
+ If u buy stock before the ex-dividend date, u will receive dividends
+ If you buy stock on or after the ex-dividend date, you will not receive dividends
(In this case, the seller who sells the stock to you will receive the dividend)

Price behavior: On the ex-dividend date, the stock price drops by the amount of
dividend (D) (if there is no personal tax) or the amount of after-tax dividend D(1-t)
(if there is personal tax)
R square is a measure of how much of the change in ticket sales is driven by those
3 variables that we provided. And this is indicating that 12% of the variation in
ticket sales that is not very much that means we need to probably look deeper at
what is motivating ticket sales
Significance F is somewhat important and the general target is you want a
number that is smaller than point 0.5. If we don’t have that point => that is not a
very strong regression
Coefficient: if the number is negative, we say that it has a negative relationship
between ticket sales and that variables and vice versa.
If P-value is smaller than 0.5, we normally would say that these coefficients are
have an effect on ticket sales. If P-value is higher than 0.5, we would say that this
regression is not good

A correlation analysis will let us know how each of these cells as pairs really relate
together so it’s a pair analysis. So it tells us how strongly each of these or weekly
they’re related
If it’s negative that means as one goes up the other goes down
If correlation closer to -1 it becomes a strong negative,
Closer to 1 it becomes a strong positive