Corporate Financing, Equity Capital, Dividend Policy Worksheet Flashcards
(25 cards)
What must management and the board know about the company?
The ownership profile of the company.
What are the two main types of markets in corporate finance?
Primary and Secondary Markets.
What is the primary difference between primary and secondary markets?
In primary markets, new securities are sold and funds go to the issuer; in secondary markets, previously issued securities are bought and sold among investors.
What is Commercial Paper?
Short-term financing exempt from SEC registration.
What are Senior Bank Debt characteristics?
- Based on Libor plus a spread
- No SEC registration
- Mostly secured
- Most restrictive covenants
What is Mezzanine Debt?
Subordinated debt that preserves senior debt and provides a layer of long-term financing.
What is the role of credit ratings in corporate financing?
They drive the cost of financing and applicable covenants.
What is the key feature of Convertible Securities?
They have lower coupons than straight debt and allow for equity upside.
What is the primary objective of corporate finance regarding project investment?
Invest in projects yielding a return greater than the minimum acceptable hurdle rate.
What are the three theories of investor preference for dividends?
- Irrelevance
- Bird-in-hand
- Tax preference
What is the payout ratio calculated using?
The residual distribution model.
What are the four methods of stock repurchase?
- Buy shares on the market
- Tender Offer to Shareholders
- Dutch Auction
- Private Negotiation (Green Mail)
What does FCFE stand for?
Free Cash Flow to Equity.
What is the purpose of the residual distribution model?
To pay out any leftover earnings as dividends or stock repurchases after funding the capital budget.
What is a significant change in cash distribution observed from 1980-2013 in the U.S.?
A significant change in the form of cash distribution.
What is a characteristic of preferred stock in terms of financing?
It is the most expensive source of capital.
What must be disclosed when going public?
- Numerous reports
- Operating data
- Officer holdings
What is the impact of IPOs on the broader economic activity?
The level of IPOs historically corresponds to broader economic activity.
What does the term ‘hurdle rate’ refer to?
The minimum acceptable return for projects.
What is the main goal of dividend policy?
To balance returns to shareholders with the need for reinvestment.
What is the formula for calculating Free Cash Flow to Equity (FCFE)?
Net Income + Depreciation & Amortization - Capital Expenditures - Preferred Dividends - Principal Repayments + Proceeds from New Debt.
True or False: The issuer receives funds in secondary market transactions.
False.
Fill in the blank: The _______ structure is less restrictive in Mezzanine Debt compared to Senior Debt.
Covenant
What is the impact of high yield on corporate financing?
It is non-investment grade and drives up financing costs.
