Debt and preffered stock finacing
- 1. Presentation on Debt and Preferred Stock Financing PRESENTED BY: RUPESH NYAUPANE
- 2. Content: Introduction Features Types Merit and Demerit Use of Long term Debt in Financing Decisions Use of Preferred Stock in Financing Decisions Use of Long Term Debt in Financing Use of Preferred Stock in Financing Refunding Operation Refunding Decision Process Conclusion
- 3. Introduction Long-term Debt Preferred Stock Amount owed for a period exceeding 12 months from the date of the balance sheet. It could be in the form of a bank loan, mortgage bonds, debenture, or other obligations not due for one year. A firm must disclose its long-term debt in its balance sheet with its interest rate and date of maturity. It is important sources of financing. A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. It is a long term source of financing.
- 4. Features Long term Debt Preferred Stock Par Value Coupon Interest rate Maturity Repayment Scheme Tied up of collateral Call Provision Trustee Conversion Features Sinking Fund Par value Fixed Dividend Maturity Cumulative Features Participating Features Voting Rights Claims on Asset and Income Call Features Conversion Features Sinking Fund
- 5. Types and its definition Long Term Debt Bonds - A debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. (Mortgage bond, Debenture, subordinated Debenture, Income Bonds, Convertible Bonds, Callable Bonds, Portable Bonds) Term Loan – A loan obtained from a bank from other financial institution for which the borrower agrees to make a series of payment consisting of interest and principal on specific date. Debenture - A type of debt instrument that is not secured by physical assets or collateral.
- 6. Merit and Demerit of Long-Term debt Financing Merit Demerit Less Costly Tax Saving and Interest Payment More Flexible No dilution in control power No interference in business operation Benefit of leverage can be entertain Burden of Repayment Risk High Negative reputation on credit rating Collateral may be required Limited use of loan Fixed Maturity
- 7. Merit and Demerit of Preferred Stock Financing Merits Demerits No dilution in control power Low risk No Burden Of Repayment Benefit of conversion can be taken by company No collateral Difficulty to sale/Issue No tax saving on interest payment
- 8. Use of Long term Debt in Financing Decisions Sales and earning are relatively stable. Profit margin are adequate to make leverage advantages. A rise in profits or the general price level is expected. The existing debt ratio is relatively low Profit margins are adequate to make leverage advantages. Common stock price earning ratio are low in relation to the level of interest rates.
- 9. Use of Preferred Stock in Financing Decisions If profit margins are adequate, the firm will gain from the additional leverage provided by preferred stock. Relative cost of alternative sources of financing are important. When the use of debt involves excessive risk and issuance of common stock poses control problem, preferred stock may be a good compromise.
- 10. Use of Long Term Debt in Financing Equity Retention Growth Stability
- 11. Use of Preferred Stock in Financing The corporate investor is attracted to preferred stock as Flexibility in paying dividends and an infinite maturity (similar to a perpetual loan) are significant advantages to the corporate issuer. The after-tax cost of preferred financing is greater than that of long-term debt financing to the corporate issuer.
- 12. Refunding Operation The redemption of securities, typically debt, by raising more funds through another offering. When a company conducts a refunding operation, it recalls its existing bonds from the market. In exchange, a new bond issue is sold. The new issue is almost always issued at a lower rate of interest than the refunded issue, ensuring significant reduction in interest expense for the issuer.
- 13. Refunding Decision Process Calculate the NPV of the refunding Calculate the annual after tax Interest Saving Calculate the Differential Annual tax saving on Flotation Cost Calculate the initial outlay
- 14. Conclusion A company issues different types of securities to raise capital because different investors have different risk-return preferences. When market interest rate decrease significantly, company can redeem existing debt by issuing new debt.