B40'2302 Class

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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

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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

• The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw Hill
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Topics Covered

• Patterns of Corporate Financing
• Common Stock
• Preferred Stock

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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)

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Patterns of Corporate Financing
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Patterns of Corporate Financing
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Patterns of Corporate Financing
How to define debt ratio (aka leverage ratio)
?
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Patterns of Corporate Financing
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Common Stock

• Mobil Book Value Equity (12/97)
• Shares Issued 894 million, Outstanding 783.4
  million

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Common Stock

• Mobil Market Value (12/97)
• Total Shares outstanding 783.4 million

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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

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Preferred Stock

• Preferred Stock Another form of equity
  (i.e. directors can choose not to pay
  a dividend)
• Differences with common stock
• Promises (doesnt guarantee) fixed dividend
  stream
• Dividends (if declared) must go to preferred
  before common
• Preferred has only limited voting rights
• Tax advantages and disadvantages

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Principles of Corporate Finance Brealey and Myers
Sixth Edition

• How Corporations Issue Securities

Chapter 15.1

• Slides by
• Matthew Will, Jeffrey Wurgler

• The McGraw-Hill Companies, Inc., 2000

Irwin/McGraw Hill
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Topics Covered

• Venture Capital

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Venture Capital
Venture Capital Equity invested to finance a new
firm

• 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.

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Venture Capital
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Venture Capital