《Corporate Finance Corporate Investing and Financing Decisions》由会员分享，可在线阅读，更多相关《Corporate Finance Corporate Investing and Financing Decisions（53页珍藏版）》请在金锄头文库上搜索。
1、十一 Corporate Finance: Corporate Investing and Financing Decisions1. A: An Overview of Financial Managementa: Discuss potential agency problems of stockholders versus 1) managers and 2) creditors.An agency relationship is created when decision-making authority is delegated to an agent without the age
2、nt being fully responsible for the decision that is made. An agency relationship occurs in two common corporate scenarios: 1. the companys stockholders delegate decision-making authority to the managers (agents), but the managers do not receive the full benefit or cost of their performance, 2. the c
3、ompanys debtholders delegate authority to managers who act on behalf of the shareholders. In the first scenario, management will not bear the full impact of their decisions since they do not own 100 percent of company. In the second scenario, agency relationship may occur when creditors lend money t
4、o corporations. Creditors lend based on specific business and financial risk expectations. The stockholders/management will benefit from risky strategies that simultaneously increase the probability of success and bankruptcy. The manager receives the full benefit of success, but the creditor bears t
5、he responsibility for the bankruptcy. This is one reason loans include many restrictive covenants on the corporations behavior.b: Describe four mechanisms used to motivate managers to act in stockholders best interests.1. Managerial compensation. The total managerial salary package must compensate m
6、anagers for their performance. This is commonly done through annual performance bonuses and long-term stock options, in addition to an annual salary. There are two main methods that are used to grant shares to management: 1. Performance shares: The manager receives a certain number of shares based o
7、n the company achieving predefined performance benchmarks. 2. Executive stock options: Management is granted an option to buy the firms shares at a pre-specified price on a specific future date. Executive stock options are typically issued out-of-the-money to give management the incentive to take ac
8、tions that will boost the companys stock price. 2. Direct intervention by shareholders. As large institutions increasingly own shares, these institutions have the power and sophistication to persuasively intervene on corporate issues. 3. The threat of firing. Shareholders can nominate and elect thei
9、r own board of directors or persuade the board to encourage the current management to quit or be fired. 4. The threat of takeovers. If managements poor performance is reflected in a low stock price, a competitor may buy enough shares to have a controlling interest. At that point, the acquirer can re
10、place management with their own management team. 1.B: The Cost of Capitala: Explain why the cost of capital used in capital budgeting should be a weighted average of the costs of various types of capital the company uses.How a company raises capital and how they budget or invest it are considered in
11、dependently. Most companies have separate departments for the two tasks. The financing department is responsible for keeping costs low and using a balance of funding sources: common equity, preferred stock, and debt. Generally, it is necessary to raise each type of capital in large sums. The large s
12、ums may temporarily overemphasize the most recently issued capital, but in the long run, the firm will ascribe to target weights for each capital type. Because of these and other financing considerations, the investment decision must be made assuming a weighted average cost of capital including each
13、 of the different sources of capital and using the long-run target weights.b: Define and calculate the component cost of: 1) debt 2) preferred stock 3) retained earnings (3 different methods) and 4) newly issued stock or external equity.The after-tax cost of debt kd (1- t) is used to compute the wei
14、ghted average cost of capital. It is the interest rate on new debt (kd) less the tax savings due to the deductibility of interest (kdt).After-tax cost of debt = interest rate- tax savings = kd- kd (t)After tax cost of debt = kd (1- t)Example: Ink Inc. is planning to issue new debt at an interest rat
15、e of 8%. Ink is in the 40% marginal federal-plus-state tax rate. What is Inks cost of debt capital?kd (1- t) = 8% (1- .4) = 4.8%Note: the cost of debt is the interest rate on new (marginal) debt, not the interest rate paid on existing or old debt. Also note that if it werent for the increasing risk
16、of bankruptcy with ever increasing leverage, the tax deductibility of interest would lead to 100% debt in the capital structure.Preferred stock is a perpetuity that pays a fixed dividend (Dps) forever. The cost of preferred stock (kps) is:Cost of preferred stock = kps = Dps / PnetWhere:Dps = preferred dividends.Pnet = net issuing price after deducting flotation costs.Example: Suppose Ink has preferred stock that pays an $8 dividend per share and sells for $100/share.
