Corporate issuers Flashcards
Dual-class structure
Different classes out outstanding commons stocks with different voting rights e.g. founders have majority voting rights without majority shares. CFA advocates against
Primary liquidity sources for corporate issuers (4)
- Cash on hand
- Marketable securities on hand
- Bank borrowing
- Cash generated from business
Primary liquidity sources for corporate issuers (4)
- Cash on hand
- Marketable securities on hand
- Bank borrowing
- Cash generated from business
Secondary liquidity sources for corporate issuers
- Cash saved by suspending dividends to shareholders
- Delaying/ reducing capital investments
- Selling assets
- Introducing additional equity
- Restructuring debt to extend maturity
- Bankruptcy protecting filing (suspends need to service liabilities)
Drag on liquidity
Occurs when inflows lag e.g. when excess inventory builds up or becomes obsolete
Pull on liquidity
Occurs when cash flows accelerate e.g. when suppliers reduce credit lines or demand faster payments (decreased DPO)
Current ratio
current assets/ current liabilities
Quick ratio
cash and MS + AR/ current liabilities
Cash ratio
cash and MS / current liabilities
Conservative approach to managing working capital
Greater proportion of STA. Finance working capital using long term debt and equity
Pros:
- More permanent capital w less need to debt rollover
- Greater flex during market disruptions
- High prob of meeting short term obs
Cons:
- Higher costs and lower profitability
- Long term lenders may have constraints like minimum interest coverage ratio
Aggressive approach to managing working capital
- Hold less short term assets than LT, finance working capital using short term debt
Pros: Lower costs
Cons: Vulnerable to market disruptions and not meeting obligations
Moderate approach to managing working capital
Looks for middle ground:
- Permanent assets funded using long term sources of capital
- Variable (seasonable) current assets funded using short term sources
Factors affecting approach to short term funding (5)
- Company size
- Creditworthiness
- Legal systems
- Regulatory concerns
- Underlying assets
Cash Conversion Cycle formula
CCC = DOH + DOS - DPO
Capital allocation process def
Identifying and evaluation capital projects (where cash flows form it will be received for longer than a year)
Capital allocation process (4)
1) Idea generation
2) Analysing Project Proposals
3) Create firm-wide capital budget
4) Monitoring decisions and conducting a post-audit
Diff between private and public companies (3)
- Private don’t change on exchange (value not readily observable and difficult to transfer shares)
- Few regulatory requirements for private
- Private raise capital through private placement, restricted to accredited investors and high net worth individuals rather than shares
Private companies can ‘go public’ three ways
- Issue shares in IPO (may be exchange specific requirements). Use bank to underwrite issue.
-Direct listing of existing shares w stock exchange. Doesn’t raise new capital but faster than IPO - SPAC - Set up to acquire a future company, raises capital through IPO and puts funds in trust. Blank check, specified time frame
Value of a company
Debt + Equity
Issuing additional debt vs equity
Prevents dilution of shareholders proportional ownership/ higher ROE
Total working capital
Current assets - current liabilities
Total working capital
Current assets - current liabilities
Net working capital
Current assets (- cash and marketable securities) - current liabilities (excluding short term and current debt)
Capital Allocation principles (3)
- Decisions based on post tax CF (not accounting income)
- Incremental cash flows used only
- Timing of cash flows is important
Types of real options (5)
- Timing
- Abandonment
- Expansion/ growth
- Flexibility
- Fundamental
Characteristics affecting proportion of debt in capital structure (5)
- Growth and stability of revenue
- Growth and stability of cash flows
- Amount of business risk
- Amount and liquidity of company assets
- Cost and availability of debt financing
Assumptions leading to MM 1 (5)
- Capital markets are perfectly competitive
- Investors have homogenous expectations
- Investors can borrow and lend at the risk free rate
- There are no agency costs
- Investment decisions are independent of financing decisions
A business model should (5):
1) Identify potential customers
2) Describe key assets and suppliers
3) Describe product or service
4) Explain how firm will sell products and services
5) Explain pricing strategies
