1. Corporate Financial Policy
Clifford W. Smith, Jr.
Spring 2007
Handout 5
* Covers readings on course outline through Barclay/Smith (1996)

2. Financial Architecture
Leverage
Bond covenants
Public vs. private debt
Maturity
Priority
Conversion rights
Call provisions

3. Private vs Public Debt
Larger issues usually public
fixed registration fees
under-diversification of private lenders
The riskier the debt, the more likely that it will be private
easier to renegotiate
usually contains more, and more specific, contract provisions

4. Relation between Yield on Net Proceeds
and Issue Size for Representative
Private Placement and Public Issue Debt
Yield on
Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)
SAAA

5. Relation between Yield on Net Proceeds
and Issue Size for Representative
Private Placement and Public Issue Debt
Yield on
Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)
SAAA

6. Relation between Yield on Net Proceeds
and Issue Size for Representative
Private Placement and Public Issue Debt
Yield on
Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)
SAAA
SBAA
Baa (Public)
Baa (Private)

7. Relation between Yield on Net Proceeds
and Issue Size for Representative
Private Placement and Public Issue Debt
Yield on
Net Proceeds
YNP (%)
Baa (Private)
Baa (Public)
Aaa (Private)
Aaa (Public)
Issue Size ($)
SAAA
SBAA

12. Investment Opportunity Set
Growth
Opportunities
Assets in
Place
Cost of Longer Maturity Low High
(Underinvestment)
Predicted Maturity Long Short

13. Investment Opportunity Set
Growth
Opportunities
Assets in
Place
Cost of Low Priority Low High
Fixed Claims
(Creditor Conflicts)

14. Investment Opportunity Set
Growth
Opportunities
Assets in
Place
Cost of Low Priority Low High
Fixed Claims
(Creditor Conflicts)
Concentration of Lower Greater
Priority Classes

15. Impact on Priority Concentration
Benchmarking
Impact on Private Debt
Impact on Maturity
Impact on Priority Concentration
Growth Options (Merck)
Greater
Shorter
Greater
Credence Goods (Eastern)
Greater
Shorter
Greater
Product Warranties (Yugo)
Greater
Shorter
Greater
Future Product Support (Yugo/Wang)
Greater
Shorter
Greater
Supplier Financing (Campeau)
Greater
Shorter
Greater
Firm Size
Less
Longer
Less
Closely Held Firm
Greater
Shorter
Greater
Regulation
Less
Longer ?
Tax Credits — —
Less
Marginal Corporate Tax Rate — — —
Marginal Personal Tax Rate — — —
Abnormal Earnings
Greater
Shorter
Greater

18. Deregulation and Debt Maturity
Leverage and Debt Maturity in the Telecommunications industry

20. Investment Opportunity Set
Financial Architecture
Leverage High Low
Maturity Long Short
Priority (Table 5) Diffuse Concentrated
Conversional Rights Low High
Leasing (Table 4) High Low
Compensation
Level of Pay Low High
Conditional Pay Low High
Assets in
Place
Growth
Opportunities