Professor Megginson FIN 5043 BAD 5283

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Chapter 11
Long-Term Financing
Professor MegginsonFIN 5043 / BAD 5283
Spring Semester 2006
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Common Stock and Long-Term Debt
Long-Term Financing
Debt capital represents a legally enforceable
claim
Equity capital

• Common stockholders are residual claimants
• No claim to earnings or assets until all senior
  claims are paid in full
• High risk, but historically also high return

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Common Stock
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Common Stock
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Book Value Of Stockholders Equity In Pfizer
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Rights Of Common Stockholders
Voting rights of common stockholders can be
exercised in person or by proxy
Most US corporations have majority voting. Each
share one vote for each directors position
Cumulative voting gives minority shareholders
greater chance of electing one or more directors
Shareholders do not have a legal right to receive
dividends
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Preferred Stock
Preferred stock is an equity claim, though fixed
in amount

• Claim on assets and cash flow senior to common
  stock
• As equity security, dividend payments are not tax
  deductible for the corporation and are subject to
  personal income tax
• For tax reasons, straight preferred stock held
  mostly by corporations

Promises a fixed annual dividend payment, but not
legally enforceable. Firms cannot pay common
stock dividends if preferred stock in arrears
Preferred stockholders usually do not have voting
rights Venture capitalists an exception they
have control rights and receive board of
directors seats
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Methods Of Classifying Long-Term Debt
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Methods Of Classifying Long-Term Debt
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Methods Of Classifying Long-Term Debt
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Short-Term and Long-Term Debt of Pfizer
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Long-Term US Dollar Debt of Pfizer
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Basic Choices In Long-Term Financing
Corporations face four key decision variables
each year

• How much capital is needed for investment, other
  purposes?
• How much capital to raise externally vs.
  internally?
• Should external funds be raised on capital
  markets or via financial intermediaries?
• Fraction of external capital as debt vs. equity?

Internal financing cash flow from operations
minus cash dividends Amount not fixed firm can
vary dividends and capital structure
Corporations are almost always net dissavers
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Sources Of Funds For Non-Financial U.S.
Corporations
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Annual Global Securities Issuance Patterns
U.S. issuers account for two-thirds or more of
total public issue volume each year
Debt issues are over three-fourths of US total
every year Equity issues play small financing
role everywhere
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Growth of World Stock Market Trading Volume,
1983-2005
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Global Security Issues 1990-2005 (Bn)
Global debt equity
U.S. Issuers worldwide
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Number And Value Of Worldwide Security Issues In
2005
1 Totals do not include privatizations or
sovereign debt offerings.
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U.S. Public Security Offerings, 2005
Indicates record volume
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Ten Leading Investment Banks Global Securities
Issuance, 2005
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Privatization ProceedsUS Billions, 1988-2005
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Law And Finance-Legal Systems
Source Rafael LaPorta, Florencio
Lopez-de-Silanes, Andrei Shleifer, and Robert
Vishny, Legal Determinants of External
Finance, Journal of Finance 52 (July 1997), pp.
1131-1150
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World Stock Market Capitalization, 1983-December
2005 (US Billions)
Sources World Bank, World Federation
of Exchanges
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Ownership Structure And Corporate Governance In
Continental Europe
Source Lean, Mean and European A Survey of
European Business, The Economist (April 29,
2001), p.12
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Global Mergers and Acquisitions, 1991-2005 (US
Dollar Billions)
Source Investment Dealers Digest, early January
editions, 1990-2005
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Ten Leading Investment Banks Mergers and
Acquisitions, 2005
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Pension Funds And Capital Markets
Source The Economist (May 20, 2000), p.127
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Pension Funds And Capital Markets
Source The Economist (February 3, 2001), p.54
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Long-Term Financing
Long-term financing instruments common and
preferred stock, debt Financial deficit
difference between firms total funding needs and
internally generated cash flows Financial
intermediaries are institutions that raise funds
by selling claims on themselves Volume of
security issues surged eleven-fold in 14 years