*New* get it cheaper: . Need a complete overview of Corporate Finance (Finance and Investments) for the exam or resit? This summary has you covered. Deviating from my complete & concise series, this is a longer summary including more details and examples. Overall it is slightly less polished but mo...
, Week 1 – Topic 1 – Corporate Claims
Capital structure: sum total of all claims on the assets of the firms, “right to ownership”
Cashflow rights: how much money claim holders should receive, i.e. allocation of generated cash
Control rights: what remedies claim holders have, especially when they do not receive promised CFs
→ Example: bankruptcy for debtholders and appointment of corporate board for shareholders
Basic Building Blocks
Corporate Charter: basics of the firm, who holds decision power,
how to amend the charter, etc.
Basic building blocks: liabilities & equity (or leverage & stock)
Basic types of claims: (1) Financial claims [debt & equity, i.e.
securities] (2) Nonfinancial [corporate income taxes due, pension
obligations, accounts payable]
→ To truly have ownership you have to own all claims
Payoff diagram (right) → value of equity & debt depend on firm
value ➔ they are state-contingent claims
Note: only reflect value-varying aspects, not time-varying aspects
Liabilities
Cashflow rights: returned cash = interest payment (usually tax deductible for issuer), in event of
liquidation: absolute priority rule (APR) → Bond = senior security, paid before more-junior
Control rights: unless covenant violated or near financial distress, bondholders do not participate in
firm decisions (typically). If firm misses a payment or violates covenant: right to force bankruptcy
Note: covenants can contain more provisions, such as liquidity level requirements, breaking it can
cause bankruptcy.
Over time: hybrids → covenants that allow a bond to be converted into something else
→ Not always valuable (e.g. CEO example) but valuable ones have survived and are included here
Convertible bonds: bondholders right to convert debt to equity for predetermined price at
predetermined dates. On conversion: shareholders dilute but do not have to pay the debt anymore
→ Not always beneficial to convert: if debt would mean higher % of firm value, then keep debt
BEP @ firm value = value of bond / % of firm that bondholder controls by converting, i.e. 20/0.6=33
Note: convertible bonds have purpose, they align shareholder &
bondholder interest to a degree, if shareholders undertake project that
hurts plain bondholders they can profit if convertible.
Payoff (right): note equity slope is resulting share (40%)
Other corporate bond features:
→ More rights = lower interest rate
- Covenant: promises firm must keep or forced to redeem
→ D/E ratios, cannot sell asset, how much dividend, auditor,
what happens when it defaults on other bonds, repurchases, etc.
- Bond seniority: senior first dibs, satisfied in full before a subordinate (junior) bond
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller thomaskonings. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for £4.25. You're not tied to anything after your purchase.
