-Bring source of capital and the users of capital together
Corporate Finance Trends
Bonds 75.5% Debt
Preferred Stock 4.1%
Common Stock 20.4% Equity
Money Vs. Capital Market
Short Term Debt Securities
-T-bills
-CD’s
Long Term Debt Securities
-Stocks
-Bonds
Primary Market vs. Secondary Market
- Investment Banker
oPurchase new shares “underwriting”
oDistribution (Selling) new shares
oAdvisement Capacity
oReselling of existing securities
Flotation Costs (2)
1. Underwriters Spread
oGross price – net proceeds
2. Issuance Costs
oCommon Stock (Most Expensive)
oPreferred Stock
oBonds (Least Expensive)
Regulations:
- Securities Act of 1933: firms have to provide full disclosure of new issues
- Securities Act of 1934: put the SEC in charge of securities regulation
- Securities Acts Amendments of 1975: creation of national market system, no fixed
commissions
- Shelf Registration: register stock issues in bulk – while selling the stock over time
Interest Rates and Taxes
Purpose of Financial Markets
T-Bills or T-Bonds
-RISK FREE, guaranteed by the US Treasury there are no safer investments in the world
Risk Free Rate = Real Rate + Expected Inflationary Risk Premium
Rrf = r + IRP
(I): Nominal (or observed or actual) rate of interest
I = r + IRP + Other Risks (default, maturity, liquidity)
Summary
-If a corporation receives dividends from another corporation, it is entitled to a
deduction of 70% of the dividend it receives
-If the corporation receiving the dividends owns 20% or more of the other corporation
the amount of the deduction increases to 80%
-If the corporation receiving the dividends owns more than 80% of the distributing
corporation, it is allowed to. Deduct 100% of the dividends received
-We will assume the 70% deduction for class
Financial Statements and Analysis
1. Income Statement
oIncome
oExpenses
oProfit/Loss
o“Year Ended”
2. Balance Sheet
oAssets
oLiabilities
oStock Holders’ Equity
o“12/31/14”
3. Statement of Cash Flows
Source Use
o↓ Asset ↓ Asset
o↑ Liability ↑ Liability
oNet Profit Net Loss
oDepreciation Cash Dividends
oSale of Stock Stock Repurchase
4. Statement of Retained Earnings
-Net profits reinvested by the firm to finance future growth
Ratio Analysis
Used to monitor, analyze and compare the health of a firm to itself and/or its competition
Who Cares about the Health of a Firm?
-Stockholders’
-Creditors
-Management
Three Forms of Ratio Analysis
1. Cross-Sectional: compare the firm to its competition
2. Time Series: compare the firm to itself over time
3. Combination: compare the firm and its competition over time
Builtrite had sales of $900,000 and COGS of $280,000. In addition, operating expenses
were calculated at 25% of sales. Builtrite also received dividends of $50,000 and paid
out common stock dividends of $25,000 to its stockholders. A long-term capital gain of
$70,000 was realized during the year along with a capital loss of $40,000
Sales 900,000
COGS 280,000
GP 620,000
OE 225,000
OP/EBIT 395,000
INT EXP 0
EBT 395,000
DIV 15,000 (.30x50,000)
LTCG 20,000
Taxable Inc 430,000
395,000
20,000
375,000
15,000
20,000
