Professional Documents
Culture Documents
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Financial Markets
Competition in financial markets is fierce-much more so than in product markets. Few protected niches (ex: cannot patent the structure of a new security)
Securities sell for their true values
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Corporate Financing
Firms have three broad sources of cash. Internally generated funds New equity issues New debt issues
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Corporate Financing
What happens when the firm cannot finance all of its activities from plowed-back funds? Financial Deficit New Equity Issues New Debt Issues
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Equity Issues
Most corporations are too large to be owned by one investor; therefore they issue stock to many investors.
Example:
Dow is owned by 650,000 different investors. If it has 1.167 billion shares outstanding, how much of Dow does an investor who holds one share own?
, or 0.000000085% of Dow
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Equity Terminology
Treasury stock
Stock that has been repurchased by the company and held in its treasury.
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Equity Terminology
When a firm issues new equity, it records each new share in its books at par value. Additional Paid-in Capital
The difference between the issue price and the par value of a stock
Retained Earnings
Earnings not paid out as dividends
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Share Repurchases
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Corporate Ownership
A corporation is owned by its common stockholders.
Owners are entitled to:
Profits
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Corporate Ownership
Shareholders exercise control over the firm by voting for its board of directors.
Majority Voting
Voting system in which each director is voted on separately
Cumulative Voting
Voting system in which all votes that one shareholder is allowed to cast can be cast for one candidate for the board of directors
Proxy Contest
Takeover attempt in which outsiders compete with management for shareholders votes
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400
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Preferred Stock
Preferred Stock Advantages: Dividends Tax Advantages Potential Disadvantages: Interest rate fluctuations Floating Rate Preferred
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Corporate Debt
When issuing debt, companies promise to make payments and repay principal. But they have limited liability; debt is not always repaid.
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Debt Characteristics
Interest rate fluctuations
Coupon vs. Zero-coupon Bonds Prime Rate LIBOR
Would you expect the price of a 10-year floating-rate bond to be more or less sensitive to changes in interest rates than the price of a 10-year fixed-rate bond?
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Debt Characteristics
Funded and Unfunded Debt
Debt with more than 1 year remaining to maturity; debt due in less than one year.
Sinking Fund
A fund established to retire debt before maturity.
Callable Bond
A bond that may be repurchased by a firm before maturity at a specified call price.
If interest rates rise, would holders of callable bonds expect the firm to buy back the debt?
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Debt Characteristics
Seniority Subordinated Debt Security Secured Debt Currency and Country of Origin Eurodollars Eurobond
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Debt Characteristics
Public vs. Private Placements
Protective Covenants
Restrictions on a firm to protect bondholders
Leases
Long-term rental agreements
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Convertible Securities
Give investors the option to alter their investments if they so choose.
Warrant
The right to buy shares from a company at a stipulated price before a set date
Convertible Bond
A bond that the holder may exchange for a specified amount of another security
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With conversion:
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