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BRN 482 BRN 482
Corporate Corporate Financial Financial PolicyPolicy
Clifford W. SmithClifford W. Smith
Summer 2007Summer 2007
Handout 5Handout 5
* Covers readings on course outline through Barclay/Smith (1996)
Financial ArchitectureFinancial Architecture
LeverageLeverage Bond covenantsBond covenants
Public vs. private debtPublic vs. private debt
MaturityMaturity
PriorityPriority
Conversion rightsConversion rights
Call provisionsCall provisions
Private vs. Public DebtPrivate vs. Public Debt
Larger issues usually publicLarger issues usually public fixed registration fees under-diversification of private
lenders
The riskier the debt, the The riskier the debt, the more likely that it will be more likely that it will be privateprivate easier to renegotiate usually contains more, and more
specific, contract provisions
Relation between Yield on Net Proceeds Relation between Yield on Net Proceeds & Issue Size for Representative Private & Issue Size for Representative Private
Placement and Public Issue DebtPlacement and Public Issue Debt
Yield on Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)SAAA
Relation between Yield on Net Proceeds and Relation between Yield on Net Proceeds and Issue Size for Representative Private Placement Issue Size for Representative Private Placement
and and PublicPublic Issue Debt Issue Debt
Yield on Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)SAAA
Relation between Yield on Net Proceeds Relation between Yield on Net Proceeds and Issue Size for Representative Private and Issue Size for Representative Private
Placement and Public Issue DebtPlacement and Public Issue Debt
Baa (Private)
Yield on Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)SAAA SBAA
Baa (Public)
Relation between Yield on Net Proceeds Relation between Yield on Net Proceeds and Issue Size for Representative Private and Issue Size for Representative Private
Placement and Public Issue DebtPlacement and Public Issue Debt
Baa (Private)
Yield on Net Proceeds
YNP (%)
Aaa (Private)
Aaa (Public)
Issue Size ($)SAAA SBAA
Baa (Public)
Investment Opportunity SetInvestment Opportunity Set
Assets inPlace
GrowthOpportuniti
es
Cost of Longer Maturity Low High (Underinvestment)
Predicted Maturity Long Short
Investment Opportunity SetInvestment Opportunity Set
Assets in
Place
GrowthOpportuniti
es
Cost of Low Priority Low High Fixed Claims(Creditor Conflicts)
Assets in
Place
GrowthOpportuniti
es
Cost of Low Priority Low High Fixed Claims(Creditor Conflicts)
Concentration of Lower Greater Priority Classes
Investment Opportunity SetInvestment Opportunity Set
BenchmarkingImpact on
Private Debt
Impact on Maturity
Impact on Priority
Concentration
Growth Options (Merck) Greater Shorter Greater
Credence Goods (Eastern) Greater Shorter Greater
Product Warranties (Yugo) Greater Shorter GreaterFuture Product Support
(Yugo/Wang)Greater Shorter Greater
Supplier Financing (Campeau) Greater Shorter Greater
Firm Size Less Longer Less
Closely Held Firm Greater Shorter Greater
Regulation Less Longer ?
Tax Credits — — Less
Marginal Corporate Tax Rate — — —
Marginal Personal Tax Rate — — —
Abnormal Earnings Greater Shorter Greater
Deregulation and Debt MaturityDeregulation and Debt Maturity
Leverage and Debt Maturity in the Telecommunications industry 1974-1994
Investment Opportunity SetInvestment Opportunity Set
Financial Architecture Leverage High Low Maturity Long Short Priority (Table 5) Diffuse Concentrated Conversional Rights Low High Leasing (Table 4) High Low
Compensation Level of Pay Low High Conditional Pay Low High
Assets in
Place
GrowthOpportunitie
s