财务管理基础课件：Long-Term Debt and Lease Financing

Long-TermDebtandLeaseFinancing

ChapterOutlineConsiderationsinanalyzinglong-termdebtBondyieldanalysisCorporatedecisionastocallinandreissueofdebtwheninterestratesdeclineLong-termleaseobligationsanditscharacteristicsBankruptcy–failuretomeetfinancialobligationsTheExpandingRoleofDebtGrowthincorporatedebtisattributedto:RapidbusinessexpansionInflationaryimpactontheeconomyInadequatefundsgeneratedfromtheinternaloperationsofbusinessfirmsExpansionoftheU.S.economyhasplacedpressureonU.S.corporationstoraisecapitalNewsetofruleshavebeendevelopedforevaluatingcorporatebondissuesTimesInterestEarned

forStandard&Poor’sIndustrialsTheDebtContractCorporatebond:Thebasiclong-termdebtinstrumentBasicitemsofabondagreementinclude:Parvalue:InitialorprincipalorfacevalueofthebondCouponrate:ActualinterestrateonthebondMaturitydate:FinaldateonwhichrepaymentofbondprincipalisdueBondindenture,asupplementtothebondagreementSecurityProvisionsSecureddebtshavespecificassetspledgedtobondholdersintheeventofdefaultTheseassetsareseldomactuallysoldandproceedsaredistributedTermsusedtodenotecollateralizedorsecureddebts:Mortgageagreement:RealpropertyispledgedAfter-acquiredpropertyclauserequiresanynewpropertytobeplacedundertheoriginalmortgageGreatertheprotectionoffered,loweristheinterestrateonthebondUnsecuredDebtDebtthatisnotsecuredbyaclaimtoaspecificassetDebenture:Unsecured,long-termcorporatebondwithageneralclaimagainstthecorporationMaybehigh-rankingandsubordinatedSubordinateddebenturePaymenttotheholderwilloccuronlyafterthedesignatedseniordebentureholdersaresatisfiedPriorityofClaimsMethodsofRepaymentDoesnotalwaysinvolvealump-sumdisbursementatthematuritydateRepaymentofbondscanbedoneby:Simplestmethod:Single-sumpaymentatmaturitySerialpayments:PaidoffininstallmentsoverthelifeoftheissueSinking-fundprovision:Semiannual/annualcontributionsmadeintoafundrunbyatrusteeConversion:ConvertingdebttocommonstockCallfeature:RetireorforceindebtissuebeforematurityBondPrices,Yields,andRatingsFinancialmanagersmustbesensitivetothebondmarketwithregardto:InterestratechangesPricemovementsMarketconditionswillinfluence:TimingofnewissuesCouponrateofferedMaturitydateBondsdonotmaintainstablelong-termpricepatternsBondPriceTableThelongerthelifeoftheissue,thegreatertheinfluenceofinterestratechangesonthepriceofthebondBondYieldsThreedifferentways:Couponrate(nominalyield): Statedinterestpayment¸ParvalueCurrentyield: Statedinterestpayment¸CurrentpriceYieldtomaturity:Theinterestratethatequatesfutureinterestpaymentsandthepaymentatmaturitytothecurrentmarketprice

BondRatingsRatingsarebasedonacorporation’s:AbilitytomakeinterestpaymentsConsistencyofperformanceSizeDebt-equityratioWorkingcapitalposition,etc.Twomajorbondratingagencies:Moody’sInvestorServiceNinecategoriesofranking:Aaa,Aa,A,Baa,Ba,B,Caa,Ca,andCwithnumericalmodifiers(1forhighest,2formidrange,and3forlowest)Standard&Poor’sCorporationSimilartoMoody’swith+and−modifiersExaminingActualBondRatingsHighratedsecuritiescarrylowerriskandhencethelowerinterestpaymentsThetruereturnonabondismeasuredbyyieldtomaturityBondsofequalquality(rating)andmaturitymaybesoldatdifferentpricesdependingupontheircouponratesandyieldstomaturityTheRefundingDecisionExample:Bondsissuedat11.75%witnessesadropininterestratesto9.5%Assumingthattheinterestrateswillrise:Theexpensive11.75%bondsmayberedeemedAnewdebtattheprevailing9.5%maybeissuedThisprocessislabeledasarefundingoperationItismadefeasiblebytheoptionofcallprovisionCapitalBudgetingProblemTherefundingdecisioninvolves:OutflowsintheformoffinancingcostsrelatedtoredeemingandreissuingsecuritiesInflowsrepresentedbysavingsinannualinterestcostsandtaxsavingsCapitalBudgetingProblem-ExampleCapitalBudgetingProblem–Example(cont’d)A.Outflowconsiderations:1.Paymentofcallpremium2.UnderwritingcostonnewissueB.Inflowconsiderations:3.Costsavingsinlowerinterestrates4.UnderwritingcostonoldissueC.Netpresentvalue:Presentvalueofinflow–Presentvalueofoutflow=NetpresentvalueStepA–OutflowConsiderationsPaymentofcallpremium:TheFirstoutflowisthe10percentcallpremiumon$10million,or$1millionresultinginanafter-taxcostof$650,000(i.e.$1,000,000(1−T)=$1,000,000(1−0.35)=$650,000)Underwritingcostonnewissue:Thesecondoutflowisthe$200,000;consideringthepresentvalueoffuturetaxsavingsonnoncashwrite-offofunderwritingcost,netcostofunderwritingwouldbe:

Actualexpenditure....................................$200,000

−PVoffuturetaxsavings.........................40,145 [$3,500×11.470(n=20,i=6%)]Netcostofunderwritingexpenseonthenewissue……………............$159,855StepB–InflowConsiderationsCostsavingsinlowerinterestrates:Thecorporationwillenjoya2.25percentagepointdropininterestrates,from11.75percentto9.50percent,on$10millionofbondsSavingininterestresultsinpaymentofmoretaxDeterminingthepresentvalueofcostsavingininterestrates

Interestsavings=$10million´2.25%=$225,000 After-taxsavings=$225,000´(1-0.35)=$146,250 Presentvalueofafter-taxinterestsavings=

$146,250×11.470(n=20,i=6%)=$1,677,488StepB–InflowConsiderations(cont’d)Underwritingcostonoldissue:Totalunderwritingcosts=$125,000Amortized@$5,000ayearfor5years=$25,000Unamortizedcost=$100,000Presentvalueoffuturewrite-off=$5,000×11.470(n=20,i=6%)=$57,350Gainfromimmediatewrite-off=$100,000-$57,350=$42,650Taxsavingsonamortizingoldunderwritingcosts$42,650×0.35=$14,928StepC–NetPresentValueOtherFormsofBondFinancingTwoinnovativeformsofbondfinancingthatarepopularinclude:Zero-couponratebondFloatingratebondZero-couponRateBondAbondthatdoesnotpayinterestAdvantagestothecorporation:Immediatecashinflow,nooutflowuntilmaturityThedifferenceinthevalueatmaturitycanbeamortizedfortaxpurposesAdvantagetotheinvestor:AllowslockinamultiplieroftheinitialinvestmentDisadvantages:AnnualincreaseinthevalueofthebondsistaxableasordinaryincomePricesarevolatileinnatureFloatingRateBondTheinterestratepaidonthebondchangeswithmarketconditionsAdvantagetotheinvestor:Aconstantmarketvalueforthesecurity,althoughinterestratesvaryException:ThesebondsoftenhavebroadlimitsthatinterestpaymentscannotexceedZero-Coupon

andFloatingRateBondsAdvantagesofDebtInterestpaymentsaretax-deductibleThefinancialobligationisclearlyspecifiedandisofafixednatureException:FloatingratebondsInaninflationaryeconomy,debtmaybepaidbackwith‘cheaperdollars’Theuseofdebt,uptoaprudentpoint,maylowerthecostofcapitaltothefirmDrawbacksofDebtInterestandprincipalpaymentobligationssetbycontractmustbemetregardlessofeconomicpositionofthefirmIndentureagreementsmayplaceunduerestrictionsonthefirmBondholdersmaytakevirtualcontrolofthefirmifimportantindentureprovisionsarenotmetUtilizedbeyondagivenpoint,debtmaydepressoutstandingcommonstockvaluesEurobondMarketAbondpayableintheborrower’scurrencybutsoldoutsidetheborrower’scountryUsuallysoldbyaninternationalsyndicateofinvestmentbankersDisclosurerequirementsintheEurobondmarketarelessdemandingthanthoseofSECorotherdomesticregulatoryagenciesExamplesofEurobondsLeasing–AFormofDebtLeasinghasthecharacteristicsofadebtAcorporationcontractstoleaseandsignsanoncancelable,long-termagreementCompaniesareexpectedtofullydivulgeallinformationaboutleasingobligationsSFASNo.13issuedbytheFASBrequires:Certaintypesofleasesmustbeshownaslong-termobligationsonthefinancialstatementsofthefirmLeasemaybecapital(financing)leaseoroperatingleaseCapital(Financing)LeaseFourconditionsforidentificationinclude:ThearrangementtransfersownershipofthepropertytothelesseebytheendoftheleasetermTheleasecontainsabargainpurchasepriceattheendoftheleaseTheleasetermisequalto75%ormoreoftheestimatedlifeoftheleasedpropertyThepresentvalueoftheminimumleasepaymentsequals90%ormoreofthefairvalueoftheleasedpropertyattheinceptionoftheleaseThediscountrateforthistestistheleasingfirm’snewcostofborrowingorthelessor’simpliedrateofreturnundertheleaseThelowerofthetwomustbeusedwhenbothareknownOperatingLeaseDoesnotmeettheconditionsofacapitalleaseUsuallyshort-term,cancelableattheoptionofthelesseeThelessormayprovideforthemaintenanceandupkeepoftheassetDoesnotrequireacapitalization,orpresentation,ofthefullobligationo