1. Long term financing Chapter 12: 2,5,8,13,15 Chapter 13: 6,8,16,23 Chapter 14: 1,3,9,11 Chapter 20: 6,12,16

6. Characteristics of stock vs. debt Debt vs. Equity –Residual claim? –Payments are tax deductible? –Finite life? –Voting rights? Hybrid securities (preferred)

8. Characteristics of debt securities Security Seniority Callable Convertible Covenants Credit rating

9. Example: Estimating debt ratios (MV) with complex capital structures Kmart is trying to estimate its debt ratio. It has 1 million shares outstanding, trading at $50 per share, and $250 million in straight debt outstanding (with a yield ot maturity of 9%). It also has two other securities outstanding: 1) it has 200,000 warrants outstanding, conferring on ints holders the right to buy stock at $65 per share. These warrants are trading at $12 each. 2) It also has 10,000 20-year convertible bonds outstanding, with a coupon rate of 6% and 10 years to maturity. These bonds trade at par. Estimate the debt ratio in market value terms.

10. Example: Value of convertible bonds At the end of 2003, GM had an 8.25% convertible bond, coming due in the year 2011, which was trading at $1400. It also had straight bonds, with the same maturity, trading in December 2003 at a yield of 8.4%. What is the value of the conversion option?

13. Corporate bond yield spreads