FINS1613 Lecture Notes - Lecture 2: Seasoned Equity Offering, Bond Valuation, Zero-Coupon Bond
Chapter 6: Valuatio of a Fir’s Securities
Capital Structure
- Corporations: legal entity, distinct from owner- separation ownership+mgmt.
- Firs soure of fiaig is alled its apital- capital struc is the ownership struc-
debt, equity, other securities
- Market value (NPV)- price investors willing to pay for cash flows and legal rights
promised- face value vs. book value (historical values)
- Securities: financial instruments give investors rights to cash flows (debt bonds +
equity pref/ordinary shares) market value determined by expected cash
flows/guarantees/ctrl rights
o Terms of the cash flows
o Rights of the investors to enforce payment
o Ability of investors to influence firm decision making
- Bond: gov/corp sell to raise money- obligated to make paym to bond holders- failure
to do so has legal repercussions
- Pref shares: reeie diided paid i preferee to pa to ordiar shares- not
guaranteed/firm not obligated to make paym to pref
- Ordinary (show how firm is doing): dividends- not guaranteed and change over time-
common stock- market cap= price*shares outstanding
- Administration (bankruptcy): paym in bankruptcy ordered by absolute priority-
bonds w seniority VS. paym in liquidation subj to secured collateral- decrease risk of
owning debt
- Residual claim- ordinary share equity – firm does poorly paym made to all other
securities BUT if it does well, residual claimant receives excess CF – ordinary shares
benefit the most when a firm does well and lose the most when firm does poorly
- Financing options: existing cash, security issuance
Issuance
- underwriters: advice, manage, security struc, markets and sells security
- debt issuance: private debt (not traded debt- bank loans), public debt (bonds
publicly traded)
find more resources at oneclass.com
find more resources at oneclass.com
- equity assurance: IPO, Seasoned equity offering (SEO- new shares to raise capital
or of existing shares from large investors)
Enterprise value + cash = Market value of debt + market value of equity
- p.20 take into account cash decrease 0.3-0.1, if it says does not affect firm ability to
make debt paym leave debt as it is
- enterprise value reflect total NPV of projects
- cost of debt and cost of equity determine appropriate discount rate for project- cost
of capital
Valuation approach
- determine expected cash flows, estimate discount rate by comparison to traded
asset w similar risk, present value
- BONDS: gov (risk free), corporate (risky- default ie credit risk)
o Term- maturity date- final repaym date of bond
o Face/par value- value used to compute coupon amounts- due at maturity in
addition to final coupon
o Coupon rate- period interest paym APR (promised interest paym of a bond
paid periodically till maturity) (note treasury indexed bonds- account for CPI)
o Period- frequency
Coupon Bond CF
- Sources:
o Difference between purchase price and face value
o Periodic coupon paym
- YTM: rate of return of investing in the bond and holding to maturity (single discount
rate of annuity)
YTM of coupon bond
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Corporations: legal entity, distinct from owner- separation ownership+mgmt. Fir(cid:373)(cid:859)s sour(cid:272)e of fi(cid:374)a(cid:374)(cid:272)i(cid:374)g is (cid:272)alled its (cid:272)apital- capital struc is the ownership struc- debt, equity, other securities. Market value (npv)- price investors willing to pay for cash flows and legal rights promised- face value vs. book value (historical values) Bond: gov/corp sell to raise money- obligated to make paym to bond holders- failure to do so has legal repercussions. Pref shares: re(cid:272)ei(cid:448)e di(cid:448)ide(cid:374)d paid (cid:858)i(cid:374) prefere(cid:374)(cid:272)e to(cid:859) pa(cid:455)(cid:373) to ordi(cid:374)ar(cid:455) shares- not guaranteed/firm not obligated to make paym to pref. Ordinary (show how firm is doing): dividends- not guaranteed and change over time- common stock- market cap= price*shares outstanding. Administration (bankruptcy): paym in bankruptcy ordered by absolute priority- bonds w seniority vs. paym in liquidation subj to secured collateral- decrease risk of owning debt. Underwriters: advice, manage, security struc, markets and sells security. Debt issuance: private debt (not traded debt- bank loans), public debt (bonds publicly traded)
