Overview of Corporate Finance Chapter 11 Highlights Sources of Funds for Corporate Financing –NPV and other techniques tell us what projects to invest in –Now determine how to raise the funds

Nuggets from Chapter 11 Use market values wherever possible –Financial models will include errors Consider economic rents and competitive advantage –Can Google protect its competitive advantage? Consider how competitors will react Warren Buffet on the automobile and airlines industries Look for long term economic advantage

Sources of Funds Internal funds –Primary source of funds –Advantages –Concerns New equity Debt –How much do firms borrow –How much should firms borrow

Common Stock Key terms –Authorized share capital –Issued and outstanding –Issued but not outstanding –Par value –Additional paid-in capital Ownership –Households –Institutions Pension funds, insurance companies, mutual funds –International

Common Stock Dividends Not tax deductible by the corporation –Can lead to double taxation Discretionary –Can be increased, decreased or omitted Portion of shareholder return –Along with capital gains

Voting Rights on Common Stock Majority voting Cumulative voting Classes of ownership Voting borrowed shares

Other Forms of Equity Equity in disguise –Master limited partnerships –Real Estate Investment Trusts (REITs) Preferred stock –Fixed dividends –Can be omitted, but cannot pay common dividend that period –Cumulative preferred stock –Dividends are not tax deductible by the corporation

Debt Commitment by the corporation to pay interest and principal Interest is tax deductible by the corporation Consequences of default

Key Debt Questions Long or short term borrowing Fixed or floating rate Dollars or other currency Promises –Senior or junior –Secured with collateral –Covenants Convertible bonds

Financial Institutions Types of institutions –Banks –Insurance companies –Pension funds –Mutual funds –Hedge funds Payment mechanism Borrowing and lending Pooling risk

Next Class Case 1 – Ben & Jerry’s –Case is available in IUB on the course packet wall –Be prepared to discuss the case in class