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B40.2302 Class #5. BM6 chapters 14.1-14.3, 15.1 Based on slides created by Matthew Will Modified 10/10/2001 by Jeffrey Wurgler. Principles of Corporate Finance Brealey and Myers Sixth Edition. An Overview of Corporate Financing. Slides by Matthew Will, Jeffrey Wurgler.
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B40.2302 Class #5 • BM6 chapters 14.1-14.3, 15.1 • Based on slides created by Matthew Will • Modified 10/10/2001 by Jeffrey Wurgler
Principles of Corporate Finance Brealey and Myers Sixth Edition • An Overview of Corporate Financing Slides by Matthew Will, Jeffrey Wurgler Chapter 14.1-14.3 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000
Topics Covered • Patterns of Corporate Financing • Common Stock • Preferred Stock
Patterns of Corporate Financing • Two ways to finance investment: • Raise equity or debt (external finance) • Plow back profits rather than distribute them to shareholders (internal finance)
Patterns of Corporate Financing How to define “debt ratio” (aka “leverage ratio”) ?
Common Stock MobilBook Value Equity (12/97) Shares Issued = 894 million, Outstanding = 783.4 million
Common Stock Mobil Market Value (12/97) Total Shares outstanding = 783.4 million
Common Stock • Typical common shareholder rights: • Right to vote for director candidates • If own 100 shares, and 5 directors to be elected • Majority voting: have 500 votes, can only apply 100 to any one candidate • Cumulative voting: can apply all 500 votes to one candidate • Right to vote in “proxy contests” (e.g. control contests) • May be multiple “classes” of common stock w/different voting rights • Can get control of firm without buying all shares
Preferred Stock Preferred Stock – Another form of equity (i.e. directors can choose not to pay a dividend) Differences with common stock: • Promises (doesn’t guarantee) fixed dividend stream • Dividends (if declared) must go to preferred before common • Preferred has only limited voting rights • Tax advantages and disadvantages
Principles of Corporate Finance Brealey and Myers Sixth Edition • How Corporations Issue Securities Slides by Matthew Will, Jeffrey Wurgler Chapter 15.1 Irwin/McGraw Hill • The McGraw-Hill Companies, Inc., 2000
Topics Covered • Venture Capital
Venture Capital Since success of a new firm is highly dependent on the effort of the managers, restrictions are placed on management by the venture capital company and funds are usually disbursed in stages, after certain milestones are achieved. Venture Capital Equity invested to finance a new firm
