1 / 9

FINANCING DECISIONS How to Finance Assets

FINANCING DECISIONS How to Finance Assets. Debt Instruments Mortgage Bonds - secured with real estate Chattel Bonds - secured with personal property Unsecured Debt Debentures- Backed by name only “Junk Bonds”- Very high risk, high yield Payment made on debt is interest.

molimo
Download Presentation

FINANCING DECISIONS How to Finance Assets

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. FINANCING DECISIONSHow to Finance Assets • Debt Instruments • Mortgage Bonds- secured with real estate • Chattel Bonds- secured with personal property • Unsecured Debt • Debentures- Backed by name only • “Junk Bonds”- Very high risk, high yield • Payment made on debt is interest

  2. FINANCING DECISIONS • Equity Securities- Shares of ownership in company • Common Stock • Voting rights • Price Volatile • Last to receive Value Created- dividends • Preferred Stock • Preference over common for dividends • no voting rights • higher yield than common

  3. FINANCING DECISION RULE FINANCING SHOULD RESULT IN MAXIMUM SHAREHOLDER VALUE To maximize value- maximize stock price To maximize Stock price- maximize EPS EPS = Net Income/ No. shares common stock outstanding

  4. MAXIMIZING FIRM VALUE Example- 1. Assume EPS = $3.00/Share 2. If Valuation multiple is 25, then Market Price is $75/Share 3. Multiply Shares Outstanding by Market Price (EG) 20,000,000 shares X $75/share = $1,500,000,000 4. If EPS rises to $4.00/share, then market value increases to 20,000,000 shares X $100/ share = $2,000,000,000 5.Share price is 25 x $4.00/share = $100/share

  5. EBIT-EPS ANALYSIS EBIT operating earnings LESS: INTEREST debt x int. rate NIBT pre-tax earnings LESS: TAX NIBT x tax rate NIAT NIBT-TAX LESS: P/S DIV. P/s X rate EARNINGS AVAIL. NIAT-P/S Div No. shares C/S O/S Earnings available/ CS OS = EPS Earnings per Share

  6. EBIT-EPS ANALYSIS EBIT $10000 Operating Earnings Less: Interest -1000 $20000x.05 NIBT 9000 EBIT-Interest Less: Tax - 4500 NIBT x .50 NIAT 4500 NIBT-TAX Less: P/S DIV -1500 NIAT-(PS x RATE) Earnings Available 3000 NIAT-P/S DIV =EPS $.30 NO. Shares C/S O/S 3000/ 10000

  7. EBIT-EPS EXAMPLE Current Structure EBIT $150000 LESS: INT ($250000X.10) -25000 NIBT 125000 LESS: TAX (.50) -62500 NIAT 62500 LESS: P/S DIV. -12500 EARNINGS AVAIL 50000 . No. shares C/S O/S 50000 =EPS $1/Share

  8. FINANCING NEW PROJECT 1. Project cost is $400000 2. Additional EBIT will be $200000 3. Tax rate is .50 4. Can finance with all debt at .06 or, 5. Issue 50000 new shares at $8/Share 6. Existing Capital Structure remains in place 7. Calculate EPS under each alternative 8. NO. SHARES O/S IS 50000 9. Pick Financing method with higher EPS

  9. FINANCING NEW PROJECT CURRENT DEBT COMMON EBIT $150000 $350000 $350000 -INT -25000 - 49000 - 25000 NIBT 125000 301000 325000 -TAX (.50) -62500-150500-162500 NIAT 62500 150500 162500 -P/S DIV -12500-12500-12500 EARN. AV 50000 138000 150000 / C/S O/S 50000 50000 100000 EPS $1/SH $2.76/SH $1.50/SH

More Related