Скачать презентацию 14 — 1 B 40 2302 Class 6
2714ea8cdd514d2404427f10b31321ff.ppt
- Количество слайдов: 57
Скачать презентацию 14 — 1 B 40 2302 Class 6
Скачать презентацию 14 — 1 B 40 2302 Class 6
14 - 1 B 40. 2302 Class #6 w BM 6 chapters 14. 4, 22. 1 -22. 3, 25. 1, 23 14. 4, 22. 1 -22. 3, 25. 1: debt varieties è 23: debt valuation è w Based on slides created by Matthew Will w Modified 10/18/2001 by Jeffrey Wurgler Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
Principles of Corporate Finance Brealey and Myers u Sixth Edition An Overview of Corporate Financing Slides by Matthew Will, Jeffrey Wurgler Irwin/Mc. Graw Hill Chapter 14. 4 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 3 Topics Covered w Debt At first glance, many different forms of debt è But all share common features… è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 4 Corporate Debt General features of debt è è è Borrower (stockholder) promises a certain stream of interest and principal payments But borrower may choose to default Lender doesn’t usually have voting rights, but in case of default lender gets assets • Asset administration handled by bankruptcy court Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 5 Irwin/Mc. Graw Hill Corporate Debt ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 6 Corporate Debt (Mobil continued (!)) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
Principles of Corporate Finance Brealey and Myers u Sixth Edition The Many Different Kinds of Debt Slides by Matthew Will, Jeffrey Wurgler Irwin/Mc. Graw Hill Chapter 24 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 8 Topics Covered w Domestic Bonds and International Bonds w The Bond Contract w Interest, Security, Seniority w Asset-Backed Securities w Repayment/Retirement Provisions w Covenants w Private Placements and Project Finance Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 9 Bond Terms: Markets w Foreign bonds - Bonds that are sold to local investors in another country's bond market (in local currency) è è Yankee bond- a foreign bond sold in the United States. Samurai bond - a foreign bond sold in Japan. w Eurobond market – Bonds sold across several international markets (in a single major currency) è è Note: nothing specific to Europe, nothing to do with “euro” currency! Just denotes bonds that are issued/distributed across many countries Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 10 Bond Terms: The contract w Indenture or trust deed - the bond agreement between the borrower and a trust company. w Agreement lists main terms of the contract w Trustee’s role: è Agent for individual bondholders è Represents them in event of default Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 11 Bond Terms: Who keeps track w Registered bond – company keeps track of bond owners, repays them directly è Most common in US w Bearer bond – bondholder sends in “coupons” to claim interest payments and must send the certificate to claim principal repayment è More common overseas Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 12 Bond Terms: Interest w Fixed-rate debt keeps paying a constant interest rate over the life of the bond w Floating-rate debt pays an interest rate that fluctuates with the general level of interest rates Common benchmark rate is LIBOR (“London Inter. Bank Offered Rate”) è Loan agreements negotiated with banks are commonly floating rate. è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 13 Bond Terms: Security w Unsecured debt obligations are most common for industrial and financial firms è è Debentures - long-term unsecured issue Notes – short-term unsecured issue w Secured bonds have a claim to certain assets upon default è è è Mortgage bonds - long-term secured debt that may contain a claim against a specific building or property Collateral trust bonds – bonds issued by holding companies that use common stock in other companies as collateral Equipment trust certificate – (not a bond) debt issued to finance railroad equipment, trucks, aircraft, or ships Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 14 Bond Terms: Seniority Priority of claims on firm’s assets: w Senior secured debt w Senior unsecured debt w Junior/subordinated debt è Junior (or subordinated) debt w Residual claimants are shareholders è Preferred shareholders rank above common Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 15 Asset-backed securities w Asset-backed securities: Rather than borrow directly, companies may bundle a group of assets and then sell the cash flows from these assets è Example: Mortgage lenders • They get cash now • They “pass-through” the mortgage repayments they receive to the AB securityholders è Example: Rock star David Bowie • Got $55 million in 1997 • “passed-through” the royalties to his albums to the “Bowie bondholders” Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 16 Bond Terms: Retirement w Sinking fund - a fund established to retired debt before maturity. Low-quality issues: strict sinking fund requirement è High-quality issues: light requirement, so large “balloon” payment of principal left at maturity è w Callable bond - a bond for which the firm has the option to repay early for a specified call price. w Putable (or retractable) bond – a bond for which investors have the option to demand early repayment Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 17 Straight Bond vs. Callable Bond Value of bond Straight bond 100 Bond callable at 100 75 50 25 Value of straight bond 25 Irwin/Mc. Graw Hill 50 75 100 125 150 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 18 Bond Terms: Covenants w Restrictive (negative) covenants - “must not” limits set by bondholders Limits on debt ratios è Limits on dividends è Limits on leasing è Negative pledge clause (“me too” clause) è • Gives (unsecured) debentures equal protection if and when assets are mortgaged w Positive covenants – “must” limits è Minimum net working capital Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 19 Value of covenants: An example 1992 - 1993 Marriott spun off its hotel management business worth 80% of its value. Before the spin-off, Marriott’s long-term book debt ratio was 79%. Almost all the debt was kept with the parent (renamed Host Marriott), whose debt ratio therefore rose to 93%. Marriott’s stock price rose 13. 8% and its bond prices declined by up to 30%. Bondholders sued and Marriott modified its spinoff plan. … hence the value of covenants Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 20 Public versus private debt w Public debt Must be registered with SEC è Standardized contract, wide investor base è Costly to issue è More common for large firms è w Privately placed debt Less registration requirements è Can be custom contract, narrow investor base è Cheaper to issue, but may be higher interest rate è Maybe more restrictive covenants è More common for small and medium-sized firms è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 21 Project Finance 1. Project is set up as a separate company. 2. A major proportion of equity is held by project manager or contractor, so finance and management are linked. 3. The project is highly levered. Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 22 Irwin/Mc. Graw Hill Project Finance ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 23 Irwin/Mc. Graw Hill Project Finance ©The Mc. Graw-Hill Companies, Inc. , 2000
Principles of Corporate Finance Brealey and Myers u Sixth Edition Warrants and Convertibles Slides by Matthew Will, Jeffrey Wurgler Irwin/Mc. Graw Hill Chapter 22. 1 -22. 3 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 25 Topics Covered w What is a warrant? w How to value a warrant under dilution? w What is a convertible bond? Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 26 Warrants Warrant - Right to buy a security (usually shares) from a company at a stipulated price, on or before a stipulated date. - A call option! Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 27 Warrant Value Example: B. J. Services warrants, expire April 2000 Exercise price = $ 15 Warrant price at maturity BJ Services share price Irwin/Mc. Graw Hill 15 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 28 United Glue Warrants w United Glue has just issued $2 million package of debt and warrants. Using the following data, calculate the warrant value. Ü # shares outstanding (N) = 1 mil Ü Current stock price (P) = $12 Ü Number of shares to be issued per share outstanding (q) =. 10 Ü Total number of warrants issued (Nq) = 100, 000 Ü Exercise price of warrants (EX) = $10 Ü Time to expiration of warrants (t) = 4 years Ü Annualized standard deviation of stock returns (sigma) =. 40 Ü Annually-compounded riskless interest rate (r) = 10 percent Ü No dividends Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 29 United Glue Warrants w United glue has just issued $2 million package of debt and warrants. Calculate the warrant value. w Suppose without the warrants, debt is worth $1. 5 million Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 30 United Glue Warrants w United glue has just issued $2 million package of debt and warrants. Calculate the warrant value. w American call option on stock with no dividends = never exercise early = same value as European call option = Black. Scholes (d 1) = 1. 104 N(d 1) =. 865 Irwin/Mc. Graw Hill (d 2) =. 304 N(d 2) =. 620 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 31 United Glue Warrants w United glue has just issued $2 million package of debt and warrants. Calculate the warrant value. Warrant = 12[. 865] - [. 620][10/1. 14] = $6. 15 w But we haven’t taken dilution into account Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 32 United Glue Warrants Calculate warrant value including dilution w When warrants are exercised, number of shares will increase by Nq=100, 000. w Assets will increase by amount of exercise money Nq*EX=100, 000*10=$1 million w Let V be value of United’s equity w Warrant value at maturity = max{P – EX, 0} (so with dilution) = max{[V+Nq. EX]/[N+Nq]-EX, 0} =1/(1+q)*max{V/N – EX, 0} w So warrant price equals the price of 1/(1+q) call options on the stock of an “alternative firm” with same total equity value V but no outstanding warrants Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 33 United Glue Warrants Calculate warrant value including dilution w Suppose (given) total value of debt is $5. 5 million (includes $1. 5 million associated with warrant issue), total assets $18 million w Or $12. 50 per share. This is the share price you want to use in Black-Scholes to account for dilution w We’ll assume volatility of undiluted firm is. 41 (use different sigma too) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 34 United Glue Warrants Calculate warrant value including dilution Note: Lower value than if don’t account for dilution, but still higher than the $5 the firm gets from the warrant issue Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 35 Convertible Bonds Convertible Bond - Bond that the holder may exchange for a specified amount of another security (usually shares). è è Convertibles are thus a combined security, combining a straight bond a call option Like bond-warrant combo, except in bond-warrant combo you don’t have to surrender one to get the other: you have both w Example to understand terms: ALZA è è è 5% Convertible 2006, face value $1000 Convertible into 26. 2 shares Conversion ratio 26. 2 Conversion price = 1000/26. 2 = $38. 17 Market price of shares = $28 Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 36 Convertible Bonds w Example to understand payoffs: Eastman Kodak è è è Suppose Eastman Kodak has issued convertibles with $1 million face value Suppose these can be converted at any time to 1 million common shares Suppose there already 1 million shares outstanding w Let’s plot the value of the convertible bond as a function of the underlying total firm asset value Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 37 Convertible Bonds w How bond value varies with firm value at maturity. Straight bond value ($ thousands) bond repaid in full default Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 38 Convertible Bonds w How conversion value at maturity varies with firm value. Conversion value ($ thousands) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 39 Convertible Bonds w How value of convertible at maturity varies with firm value. Value of convertible ($ thousands) convert bond repaid in full default Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
Principles of Corporate Finance Brealey and Myers u Sixth Edition Leasing Slides by Matthew Will, Jeffrey Wurgler Irwin/Mc. Graw Hill Chapter 25. 1 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 41 Topics Covered w Lease terminology Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 42 Lease Terms w Lessee (user of asset) promises to make a series of payments to the lessor (owner of asset) w Lease contract sets out the terms w When lease is terminated, asset goes back to owner but contract may give lessee option to buy or renew lease Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 43 Lease Terms w Operating Leases è Short-term, cancelable at option of lessee w Capital/Financial/Full-payout Leases Long-term, cover life of asset è These are a source of financing è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 44 Lease Terms w Other lease terms: Rental/full-service lease: owner services, pays property taxes, insures è Net lease: lessee services, pays property taxes, insures è Sale-and-lease-back arrangements è • To raise cash, firm sells an asset it already owns, then leases it back (e. g. sell factory, lease it back) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
Principles of Corporate Finance Brealey and Myers u Sixth Edition Valuing Debt Slides by Matthew Will, Jeffrey Wurgler Irwin/Mc. Graw Hill Chapter 23 ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 46 Topics Covered w The Term Structure w Term Structure Theories w Risk: Duration and Volatility w Risk: Default Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 47 Term Structure w We know the mechanics of how to value a straight bond: Discount each coupon at the relevant opportunity cost of capital è Usually, the term structure is not flat (as we have assumed so far) è Not a problem: discount first coupon C at r 1 , discount second coupon at r 2 , discount third coupon at r 3 etc. è rt is the cost of borrowing for a term of t periods. è Add them all up to get present value è w But what determines the discount rates r 1 and r 2 and r 3 ? w That is, what determines the term structure of interest rates ? w Especially the term structure of nominal interest rates? è Need this because the bond coupons are usually in nominal terms Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 48 Term Structure rt 1981 1987 & present 1976 Year 1 5 10 20 30 These are the interest rates you face today (t=0) to borrow $1 for t years Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 49 Term structure theories w Irving Fisher’s theory: Nominal rt = Real rt + expected inflationt (approximation) w Real rt is relatively stable, but expected inflation is highly variable w Maybe this helps to explain why nominal interest rates move so much? Or why the term structure has a certain shape? Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 50 Term structure theories More complete theories of TS: Expectations Theory Posits that return to holding a two-year bond should be equal to the expected return to rolling over a one-year bond è I. e. , (1+ r 2) 2 = (1+r 1)*(1+E[1 r 2]) è If >, nobody would hold one-year bonds è If <, nobody would hold two-year bonds è Therefore must be = è Implies: only reason for upward-sloping TS is that investors expect spot rates (one-year rates) to rise, only reason for downward-sloping TS is that investors expect spot rates to fall è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 51 Term structure theories More complete theories of TS: Liquidity-Preference Theory Expectations theory ignores risk è If your horizon is 2 years, return to holding 2 -year bond is riskless, return to rollover strategy is risky è If your horizon is 1 year, return to holding 2 -year bond and selling after 1 year is risky, return to holding 1 -year bond is riskless è Whether “long” or “short” investors dominate the market, determines where the risk premium falls è If “short” investors dominate the market, i. e. typical investor has a “liquidity preference, ” then 2 -year bond yield will have to have a premium to get them to hold it. Hence TS usually slopes upward. è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 52 Term Structure: Using it Which TS theory is right? • No agreement • Probably all have elements of truth How to integrate these theories with CAPM? • Sloppy but possible • CAPM is inherently a single-period model. TS is inherently multi-period. To use CAPM over multiple periods, could use multi-period risk-premium, multi-period beta, multi-period risk-free rate How to proceed, in practice? • To value a bond, discount its coupons using the TS appropriate for bonds of that risk Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 53 Risk: Duration & Volatility w Duration: Average time to each bond payment Longer duration means more sensitive to interest rate movements, higher volatility è Example: 5 year, 9. 0%, $1000 bond, with a 8. 5% YTM è Year CF PV@YTM 1 90 82. 95 . 081 0. 081 2 90 76. 45 . 075 0. 150 3 90 70. 46 . 069 0. 207 4 90 64. 94 . 064 0. 256 5 1090 724. 90 . 711 3. 555 1019. 70 1. 00 4. 249 Duration Irwin/Mc. Graw Hill % of Total PV % x Year ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 54 Risk: Default w Default Risk is the risk that shareholders will walk away from the debt obligation w Bond Ratings are issued by independent companies to help investors assess default risk of individual debt securities. Moody’s: Aaa, A, Baa, B, Caa, C è Std. & Poor’s: AAA, A, BBB, B, CCC, C è Top 4 ratings = “investment grade, ” below = “junk” è Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 55 Risk: Default Imagine a 1 -year bond with face value $1000 and coupon of 9%. There is an 80% chance the bond pays off fully, but a 20% chance the company defaults and pays nothing. What is the bond’s value? CF Prob 1090 . 80 = 0 . 20 = 872. 00 0 . 872. 00 = expected CF Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 56 Risk: Default • Discount with CAPM Case 1: If risk of default is purely idiosyncratic, then return has beta of 0. 0, so discount at riskless one-year rate (say that’s 9%) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
14 - 57 Risk: Default • Discount with CAPM Case 2: If risk of default is partly systematic, so return has positive beta. Now need to discount at higher rate, say 11% (11% = 9% + beta*(E[Rm]-9%)) Irwin/Mc. Graw Hill ©The Mc. Graw-Hill Companies, Inc. , 2000
Скачать презентацию 14 — 1 B 40 2302 Class 6
2714ea8cdd514d2404427f10b31321ff.ppt