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Long term financing

Long term financing. Chapter 12: 2,5,8,13,15 Chapter 13: 6,8,16,23 Chapter 14: 1,3,9,11 Chapter 20: 6,12,16. Characteristics of stock vs. debt. Debt vs. Equity Residual claim? Payments are tax deductible? Finite life? Voting rights? Hybrid securities (preferred).

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Long term financing

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  1. Long term financing Chapter 12: 2,5,8,13,15 Chapter 13: 6,8,16,23 Chapter 14: 1,3,9,11 Chapter 20: 6,12,16

  2. Characteristics of stock vs. debt • Debt vs. Equity • Residual claim? • Payments are tax deductible? • Finite life? • Voting rights? • Hybrid securities (preferred)

  3. Characteristics of debt securities • Security • Seniority • Callable • Convertible • Covenants • Credit rating

  4. Example: Estimating debt ratios (MV) with complex capital structures Kmart is trying to estimate its debt ratio. It has 1 million shares outstanding, trading at $50 per share, and $250 million in straight debt outstanding (with a yield ot maturity of 9%). It also has two other securities outstanding: 1) it has 200,000 warrants outstanding, conferring on ints holders the right to buy stock at $65 per share. These warrants are trading at $12 each. 2) It also has 10,000 20-year convertible bonds outstanding, with a coupon rate of 6% and 10 years to maturity. These bonds trade at par. Estimate the debt ratio in market value terms.

  5. Example: Value of convertible bonds • At the end of 2003, GM had an 8.25% convertible bond, coming due in the year 2011, which was trading at $1400. It also had straight bonds, with the same maturity, trading in December 2003 at a yield of 8.4%. What is the value of the conversion option?

  6. Corporate bond yield spreads

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