Essentials of Corporate Finance Chapters 12, 13, 14, and 15 Corporate Treasury Essentials of Corporate Finance Chapters 12, 13, 14, and 15 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Topics What is Corporate Treasury? Determining Capital Structure Long-Term Cash Flow Analysis Public vs. Private Management Raising Capital Debit Equity Dividend Policy Who should issue dividends? Dividend Impact to Stock Prices Raising Dividends Career Advice for a Treasury Analyst February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

What is Corporate Treasury? Corporate Treasury is the area within Finance that analyzes the company’s cash flow from an internal perspective Internal Cash Flow Analysis includes: Debt Coverage Dividend Payments Initial Public Offerings (IPO) Secondary or Additional Equity Offerings Repurchase of Stock Cash Management and Investments February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Determining Capital Structure A company’s capital structure is effectively how a company is financed What percentage of total assets are financed from debt? What percentage of total assets are financed from equity? Determining the best capital structure for a company is based on its long-term cash flow and as a going concern Does the company have a limited life? Are future cash flows certain for variable? February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Long-Term Cash Flow Analysis If the company has strong certain cash flows for several years, it should be weighted towards debt Cash flow to make debt payments Tax benefit from the interest payments Ownership is not diluted by issuing additional shares Debt has a fixed time horizon February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Long-Term Cash Flow Analysis If the company has variable or uncertain cash flows for several years, it should be weighted towards equity Less of a cash obligation for debt payments Greater flexibility for cash flow fluctuations Allows for long-term investing without worrying about short term obligations Start-ups generally issue equity as they don’t have the cash flow for the debt obligations February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Public vs. Private In the U.S., companies tend to go public so the owners can receive the cash Advantages for a Public Company Greater access to capital Owners can “cash out” Increases liquidity of the company for the owners In flow of cash for an equity issuance provides a cushion for the “what if” scenarios, and should reduce debt financing (interest rates) The company would be less risky with the additional cash and stronger balance sheet February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Public vs. Private Advantages for a Private Company Less expenses Sarbanes Oxley Board of Directors (meetings and compensation) Quarterly SEC filings Costs of issuing stock Maintain control Can always sell the company if the owner wants to “cash out” February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Management In the end, it comes down to a management decision… Does management believe it can make the debt obligations? Does management want to retain control? Does management want to “cash out”? Many companies follow the industry sector February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Raising Capital Companies raise capital for many reasons: Expansion Internal Investment Purchasing a new building Purchasing new technology Acquisition Handle Seasonal Cash Flow Needs Ski Resort in summer time February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Raising Debt Debt can be raised through Loans or Bonds Loans are made through a commercial bank Bonds are issued through investment banks Loans would be used for smaller cash flow needs, as they carry higher yields When issuing bonds, a Treasury Analyst would… Do comps on similar issuances to determine maturity and rates Analyze the overall after-tax impact Match the financing to the investment time horizon February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Raising Equity Equity would be issued through an investment bank The investment bank would help determine the price and quantity of the shares to be issued The company would pay flotation costs to the investment bank for the issuance The present ownership, if private, would receive cash in exchange for reducing ownership in the company February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Dividend Policy The Treasury Department is also responsible for the company’s dividend policy Are dividends paid monthly, quarterly, semi-annually, or annually? How much per share should be paid? What is the impact to long-term cash flow? What will be the impact on the long-term stock price? February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Who Should Issue Dividends? Companies that are stable and have strong cash flows Companies should be consistent within their sector to maintain competitiveness Companies whose investment base is looking for income Many seniors invest in Utilities for the dividend income Start-ups and fast growing companies should not issue dividends Investors will have a demand for the stock for its growth Dividends create a cash flow obligation February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Dividend Impact to Stock Prices Dividends increase the price of the stock when the announcement is made and reduces the stock price when the dividends are paid One of the key ratios stock analysts look at when analyzing which stocks to buy is the dividend payout ratio Dividend Payout Ratio = Annual Dividends / Stock Price February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Materials Created by Glenn Snyder – San Francisco State University Raising Dividends A company has to be very careful when deciding to raise dividends Typically dividend levels are very consistent so that owners will know how much they will receive Raising dividends is a sign that the company has strong current and future cash flows Raising dividends is usually a permanent increase If the company does not want to permanently raise dividends, they can issue a special one time divided February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University

Career Advice for a Treasury Analyst Understand Accounting A strong background in accounting will help understand cash flow analysis and balance sheet impacts Most Chief Treasury Officers are C.P.A.s Treasury positions are often hard to find, but a career in accounting or banking would help Other options would be to find a position within a finance department and transfer to the treasury group when a position becomes available February 26, 2007 Materials Created by Glenn Snyder – San Francisco State University