196.capital structure intro lecture 1
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196.capital structure intro lecture 1
- 3. What is “Capital Structure”? Financial Structure Balance Sheet Current Current Assets Liabilities Debt Fixed P reference Assets shares Ordinary shares
- 4. What is “Capital Structure”? Capital Structure Balance Sheet Current Current Assets Liabilities Debt Fixed P reference Assets shares Ordinary shares
- 14. The Cost of Capital Expected Return Risk premium Risk-free rate Time value of money ______________________________________________________________ Risk Treasury Corporate Preference Hybrid Bonds Bonds Shares Securities Ordinary Shares
- 16. Selected leverage data for US corporations
Notas do Editor
- 3
- The exchange feature of a convertible bond gives the right for the holder to convert the par amount of the bond for common shares a specified price or "conversion ratio". For example, a conversion ratio might give the holder the right to convert $100 par amount of the convertible bonds of Ensolvint Corporation into its common shares at $25 per share. This conversion ratio would be said to be " 4:1" or "four to one". The share price affects the value of a convertible substantially. Taking our example, if the shares of the Ensolvint were trading at $10, and the convertible was at a market price of $100, there would be no economic reason for an investor to convert the convertible bonds. For $100 par amount of the bond the investor would only get 4 shares of Ensolvint with a market value of $40. You might ask why the convertible was trading at $100 in this case. The answer would be that the yield of the bond justified this price. If the normal bonds of Ensolvint were trading at 10% yields and the yield of the convertible was 10%, bond investors would buy the bond and keep it at $100. A convertible bond with an "exercise price" far higher than the market price of the stock is called a "busted convertible" and generally trades at its bond value, although the yield is usually a little higher due to its lower or "subordinate" credit status. Think of the opposite. When the share price attached to the bond is sufficiently high or "in the money", the convertible begins to trade more like an equity. If the exercise price is much lower than the market price of the common shares, the holder of the convertible can convert into the stock attractively. If the exercise price is $25 and the stock is trading at $50, the holder can get 4 shares for $100 par amount that have a market value of $200. This would force the price of the convertible above the bond value and its market price should be above $200 since it would have a higher yield than the common shares. Issuers sell convertible bonds to provide a higher current yield to investors and equity capital upon conversion. Investors buy convertible bonds to gain a higher current yield and less downside, since the convertible should trade to it bond value in the case of a steep drop in the common share price. Investors traditionally use "breakeven" analysis to compare the coupon payment of the convertible to the dividend yield of the common shares. Modern techniques of option analysis examine the convertible as a bond with an equity option attached and value it in this manner.
- From Grinblatt and Titman
- Signaling theory is based on asymettric information and gives rise to a pecking order.
- PÓŹNIEJ; POTEM = adverb for later