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Chapter20 - Hybrid Financing - Fernarizaplanco-1
Chapter20 - Hybrid Financing - Fernarizaplanco-1
Chapter20 - Hybrid Financing - Fernarizaplanco-1
1 Preference Share
A hybrid security that represents a
cross between debt or bonds and
common stock.
2 Lease Financing
used by financial managers as an
alternative to borrowing to finance
fixed assets.
3 Option Securities
Advantages Disadvantages
A. Direct Leasing
C. Leveraged Leasing
Potential Benefits from Leasing
◉ Increased Flexibility
◉ Certain maintenance at known
cost
◉ Lower administrative costs
◉ Offers an economic advantage
Finance or Capital Lease
Illustrative Problem.
Jerdan Company plans to aquire equipment with a 5-year life which has a
cost of P10,000,000, delivered and installed. The company can borrow the
required P10,000,000, using a 10% to be amortized over 5 years that will require
annual payments of P2,637,974.81 per year. Alternatively, Jerdan can lease the
equipment for 5 years at a rental charge of P2,800,00 per year, payable at the
beginning of the year. The lessee has the option to purchase the equipment upon
the expiration of the lease. The lease contract stipulates that the lessor win the
equipment .
Finance or Capital Lease
However, if Jerdan borrows and buys, it
will have to bear the cost of maintenance,
which will be performed by the equipment
manufacturer at a fixed contract of
P500,000 per year, payable at year-end.
The equipment will be depreciated using
the straight line method. Tax rate is 32%.
The equipment will definitely be used for 5
years, at which time its estimated net
salvage value will be P750,000. Jerdan
plans to continue using the equipment so
(1) if it purchases the equipment, the
company will keep it, and (2) if it leases
the equipment, the company will exercise
an option to buy it at its estimated
salvage value.
Classification of Finance Lease
Example:
A bond is issued at par value of P 1,000 and can be
converted into 40 ordinary shares.
TYPES OF OPTIONS
1. Call options -convey the right right to buy a
share of stock at
a set price called the
exercise , or striking price.
2. Put options -give the holder the right to sell the
Option
1. Time to maturity
2. Stock price variability
Warrants
◉ Example:
Current price of ordinary share
33
Number of shares that can be purchased
2
Exercise price
30
(2 x 33) - (2 x 30) = 6
End of Presentation
Our greatest
weakness lies in
giving up. The
most certain way
to succeed is
always to try just
one more time.
H O M A S A. E D I S O N