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1、20-1CHAPTER 20Hybrid Financing: Preferred Stock, Leasing, Warrants, and ConvertiblesnPreferred stocknLeasingnWarrantsnConvertiblesch20 混合的一些工具 优先股等20-2LeasingnOften referred to as “off balance sheet” financing if a lease is not “capitalized.”nLeasing is a substitute for debt financing and, thus, use
2、s up a firms debt capacity.nCapital leases are different from operating leases:nCapital leases do not provide for maintenance service.nCapital leases are not cancelable.nCapital leases are fully amortized.ch20 混合的一些工具 优先股等20-3Analysis: Lease vs. Borrow-and-buyData:nNew computer costs $1,200,000.n3-y
3、ear MACRS class life; 4-year economic life.nTax rate = 40%.nkd = 10%.nMaintenance of $25,000/year, payable at beginning of each year.nResidual value in Year 4 of $125,000.n4-year lease includes maintenance.nLease payment is $340,000/year, payable at beginning of each year.ch20 混合的一些工具 优先股等20-4Deprec
4、iation scheduleDepreciable basis = $1,200,000MACRS DepreciationEnd-of-YearYear Rate ExpenseBook Value 1 0.33 $ 396,000 $804,000 2 0.45 540,000 264,000 3 0.15 180,000 84,000 4 0.07 84,000 0 1.00 $1,200,000ch20 混合的一些工具 优先股等20-5In a lease analysis, at what discount rate should cash flows be discounted?
5、Since cash flows in a lease analysis are evaluated on an after-tax basis, we should use the after-tax cost of borrowing. Previously, we were told the cost of debt, kd, was 10%. Therefore, we should discount cash flows at 6%.A-T kd = 10%(1 T) = 10%(1 0.4) = 6%.ch20 混合的一些工具 优先股等20-60 1 2 3 4Cost of Ow
6、ning AnalysisCost of asset(1,200.0)Dep. tax savings1 158.4 216.0 72.0 33.6Maint. (AT)2 (15.0) (15.0) (15.0) (15.0)Res. value (AT)3 _ _ _ _ 75.0 Net cash flow(1,215.0) 143.4 201.0 57.0 108.6PV cost of owning ( 6%) = -$766.948.Analysis in thousands:ch20 混合的一些工具 优先股等20-7Notes on Cost of Owning Analysis
7、1.Depreciation is a tax deductible expense, so it produces a tax savings of T(Depreciation). Year 1 = 0.4($396) = $158.4.2.Each maintenance payment of $25 is deductible so the after-tax cost of the lease is (1 T)($25) = $15.3.The ending book value is $0 so the full $125 salvage (residual) value is t
8、axed, (1 - T)($125) = $75.0.ch20 混合的一些工具 优先股等20-8Cost of Leasing AnalysisnEach lease payment of $340 is deductible, so the after-tax cost of the lease is (1-T)($340) = -$204.nPV cost of leasing (6%) = -$749.294.0 1 2 3 4A-T Lease pmt -204 -204 -204 -204Analysis in thousands:ch20 混合的一些工具 优先股等20-9Net
9、advantage of leasingnNAL = PV cost of owning PV cost of leasingnNAL= $766.948 - $749.294= $17.654 nSince the cost of owning outweighs the cost of leasing, the firm should lease.(Dollars in thousands)ch20 混合的一些工具 优先股等20-10Suppose there is a great deal of uncertainty regarding the computers residual v
10、aluenResidual value could range from $0 to $250,000 and has an expected value of $125,000.nTo account for the risk introduced by an uncertain residual value, a higher discount rate should be used to discount the residual value.nTherefore, the cost of owning would be higher and leasing becomes even m
11、ore attractive.ch20 混合的一些工具 优先股等20-11What if a cancellation clause were included in the lease? How would this affect the riskiness of the lease?nA cancellation clause lowers the risk of the lease to the lessee.nHowever, it increases the risk to the lessor.ch20 混合的一些工具 优先股等20-12How does preferred sto
12、ck differ from common equity and debt?nPreferred dividends are fixed, but they may be omitted without placing the firm in default.nPreferred dividends are cumulative up to a limit.nMost preferred stocks prohibit the firm from paying common dividends when the preferred is in arrears.ch20 混合的一些工具 优先股等
13、20-13What is floating rate preferred?nDividends are indexed to the rate on treasury securities instead of being fixed.nExcellent S-T corporate investment:nOnly 30% of dividends are taxable to corporations.nThe floating rate generally keeps issue trading near par.nHowever, if the issuer is risky, the
14、 floating rate preferred stock may have too much price instability for the liquid asset portfolios of many corporate investors.ch20 混合的一些工具 优先股等20-14How can a knowledge of call options help one understand warrants and convertibles?nA warrant is a long-term call option.nA convertible bond consists of
15、 a fixed rate bond plus a call option.ch20 混合的一些工具 优先股等20-15A firm wants to issue a bond with warrants package at a face value of $1,000. Here are the details of the issue.nCurrent stock price (P0) = $10.nkd of equivalent 20-year annual payment bonds without warrants = 12%.n50 warrants attached to e
16、ach bond with an exercise price of $12.50.nEach warrants value will be $1.50.ch20 混合的一些工具 优先股等20-16What coupon rate should be set for this bond plus warrants package?nStep 1 Calculate the value of the bonds in the packageVPackage = VBond + VWarrants = $1,000.VWarrants = 50($1.50) = $75.VBond + $75 =
17、 $1,000 VBond= $925.ch20 混合的一些工具 优先股等20-17Calculating required annual coupon rate for bond with warrants packagenStep 2 Find coupon payment and rate.nSolving for PMT, we have a solution of $110, which corresponds to an annual coupon rate of $110 / $1,000 = 11%.INPUTSOUTPUTNI/YRPMTPVFV20121101000-925
18、ch20 混合的一些工具 优先股等20-18If after the issue, the warrants sell for $2.50 each, what would this imply about the value of the package?nThe package would have been worth $925 + 50(2.50) = $1,050. This is $50 more than the actual selling price.nThe firm could have set lower interest payments whose PV would
19、 be smaller by $50 per bond, or it could have offered fewer warrants with a higher exercise price.nCurrent stockholders are giving up value to the warrant holders.ch20 混合的一些工具 优先股等20-19Assume the warrants expire 10 years after issue. When would you expect them to be exercised?nGenerally, a warrant w
20、ill sell in the open market at a premium above its theoretical value (it cant sell for less).nTherefore, warrants tend not to be exercised until just before they expire.ch20 混合的一些工具 优先股等20-20Optimal times to exercise warrantsnIn a stepped-up exercise price, the exercise price increases in steps over
21、 the warrants life. Because the value of the warrant falls when the exercise price is increased, step-up provisions encourage in-the-money warrant holders to exercise just prior to the step-up.nSince no dividends are earned on the warrant, holders will tend to exercise voluntarily if a stocks divide
22、nd rises enough. ch20 混合的一些工具 优先股等20-21Will the warrants bring in additional capital when exercised?nWhen exercised, each warrant will bring in the exercise price, $12.50, per share exercised.nThis is equity capital and holders will receive one share of common stock per warrant.nThe exercise price i
23、s typically set at 10% to 30% above the current stock price on the issue date.ch20 混合的一些工具 优先股等20-22Because warrants lower the cost of the accompanying debt issue, should all debt be issued with warrants?nNo, the warrants have a cost that must be added to the coupon interest cost.ch20 混合的一些工具 优先股等20
24、-23What is the expected rate of return to holders of bonds with warrants, if exercised in 5 years at P5 = $17.50?nThe company will exchange stock worth $17.50 for one warrant plus $12.50. The opportunity cost to the company is $17.50 - $12.50 = $5.00, for each warrant exercised. nEach bond has 50 wa
25、rrants, so on a par bond basis, opportunity cost = 50($5.00) = $250.ch20 混合的一些工具 优先股等20-24Finding the opportunity cost of capital for the bond with warrants packagenHere is the cash flow time line:nInput the cash flows into a financial calculator (or spreadsheet) and find IRR = 12.93%. This is the p
26、re-tax cost. 0 1 4 5 6 19 20+1,000 -110 -110-110-110-110-110-250 -1,000-360 -1,110.ch20 混合的一些工具 优先股等20-25Interpreting the opportunity cost of capital for the bond with warrants packagenThe cost of the bond with warrants package is higher than the 12% cost of straight debt because part of the expecte
27、d return is from capital gains, which are riskier than interest income.nThe cost is lower than the cost of equity because part of the return is fixed by contract.ch20 混合的一些工具 优先股等20-26The firm is now considering a callable, convertible bond issue, described below:n20-year, 10% annual coupon, callabl
28、e convertible bond will sell at its $1,000 par value; straight debt issue would require a 12% coupon.nCall the bonds when conversion value $1,200.nP0 = $10; D0 = $0.74; g = 8%.nConversion ratio = CR = 80 shares.ch20 混合的一些工具 优先股等20-27What conversion price (Pc) is implied by this bond issue?nThe conve
29、rsion price can be found by dividing the par value of the bond by the conversion ratio, $1,000 / 80 = $12.50.nThe conversion price is usually set 10% to 30% above the stock price on the issue date.ch20 混合的一些工具 优先股等20-28What is the convertibles straight debt value?nRecall that the straight debt coupo
30、n rate is 12% and the bonds have 20 years until maturity.INPUTSOUTPUTNI/YRPMTPVFV20121001000-850.61ch20 混合的一些工具 优先股等20-29Implied Convertibility ValuenBecause the convertibles will sell for $1,000, the implied value of the convertibility feature is$1,000 $850.61 = $149.39. = $1.87 per share.nThe conv
31、ertibility value corresponds to the warrant value in the previous example.ch20 混合的一些工具 优先股等20-30What is the formula for the bonds expected conversion value in any year?nConversion value = Ct = CR(P0)(1 + g)t.nAt t = 0, the conversion value is C0= 80($10)(1.08)0 = $800.nAt t = 10, the conversion valu
32、e is C10= 80($10)(1.08)10 = $1,727.14.ch20 混合的一些工具 优先股等20-31What is meant by the floor value of a convertible?nThe floor value is the higher of the straight debt value and the conversion value.nAt t = 0, the floor value is $850.61.nStraight debt value0 = $850.61.C0 = $800.nAt t = 10, the floor value
33、 is $1,727.14.nStraight debt value10 = $887.00.C10 = $1,727.14.nConvertibles usually sell above floor value because convertibility has an additional value.ch20 混合的一些工具 优先股等20-32The firm intends to force conversion when C = 1.2($1,000) = $1,200. When is the issued expected to be called?nWe are solvin
34、g for the period of time until the conversion value equals the call price. After this time, the conversion value is expected to exceed the call price.INPUTSOUTPUTNI/YRPMTPVFV5.27801200-800ch20 混合的一些工具 优先股等20-33What is the convertibles expected cost of capital to the firm, if converted in Year 5?nInp
35、ut the cash flows from the convertible bond and solve for IRR = 13.08%.0 1 2 3 4 51,000 -100 -100-100 -100 -100 -1,200 -1,300ch20 混合的一些工具 优先股等20-34Is the cost of the convertible consistent with the riskiness of the issue?nTo be consistent, we require that kd kc ke.nThe convertible bonds risk is a bl
36、end of the risk of debt and equity, so kc should be between the cost of debt and equity.nFrom previous information, ks = $0.74(1.08) / $10 + 0.08 = 16.0%.nkc is between kd and ks, and is consistent.ch20 混合的一些工具 优先股等20-35Besides cost, what other factor should be considered when using hybrid securitie
37、s?nThe firms future needs for capital:nExercise of warrants brings in new equity capital without the need to retire low-coupon debt.nConversion brings in no new funds, and low-coupon debt is gone when bonds are converted. However, debt ratio is lowered, so new debt can be issued.ch20 混合的一些工具 优先股等20-
38、36Other issues regarding the use of hybrid securitiesnDoes the firm want to commit to 20 years of debt?nConversion removes debt, while the exercise of warrants does not.nIf stock price does not rise over time, then neither warrants nor convertibles would be exercised. Debt would remain outstanding.ch20 混合的一些工具 优先股等
