Use of debt financing has grown very rapidly. The current low level of interest rates have provided an excellent opportunity for refunding (replacing high interest-rate bonds with low-interest rates bonds, considering cost of calling the old issue and selling a new one)
Different kinds of debt:
• bonds: deep-discount bonds (or zero coupon bonds, with of course a much lower price than its face value), government bonds, junk bonds... In the US, a lot of bonds are rated S&P or Moody’s: from Aaa (AAA for S&) to D.
Long-term bonds usually provide for repayment of principal before maturity. This is accomplished by a sinking fund. Most publicly issued bonds are callable. Generally, companies should exercise the call provision whenever the bond’s value is greater than the call price.
Usually bonds do not give voting power. Protective convenants are designed to protect bondholders from management decisions that favor stockholders at bondholder’s expense. Unsecured bonds are called debentures or notes. Most bonds are unsecrued but some like mortgage bonds are secred by tangible property or by financial securities. If the company defaults on secured bonds, the trustee can claim the assets.
Long-term financing is usually more expensive than short-term financing based on the theory of the term structure of interest rates. (does not prove always true in the reality)
Preferred and convertibles: Convertible and bonds with warrants are associated with risky companies. Warrants and convertibles cause dilution to the existing shareholders. Convertible bonds usually have call provisions. Companies appear to delay calling convertibles until the conversion value greatly excess the call price
Leasing: A large fraction of equipment is leased rather than purchased. Legal ownership remain to the lessor, but effective ownership to the lessee.
Firms generally lease for taxe purposes. Operating leases do not appear in the balance sheet. Thus a company with a lot of leases seems less endebted than it is in the reality.
Dividend Policy >>
|
|
Corporate finance
The subject: corporate finance
PART ONE: CAPITAL EXPENDITURE
The present value
Investment
decisions
Practical
problems in capital budgeting
Firms evaluation
PART TWO. BASICS OF FINANCE
The financial
markets
Options
The market
efficiency
Risk
Mergers,
Acquisitions, and Corporate Control
International
Financial Management
PART THREE FINANCING DECISIONS
Corporate
financing
Dividend policy
and capital structure
PART FOUR FINANCIAL MANAGEMENT
Financial
planning
Short-term
financial management
Courses created and updated by Dr David Chelly, PhD in Management sciences from the University of Tours.
|