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Transcript of 1 IIS Chapter 14 - Raising Capital in the Financial Markets Chapter 15 – Analysis and Impact of...

Financial Management

Chapter 14 - Raising Capital in the Financial Markets Chapter 15 Analysis and Impact of Leverage#IIS1Page #Tujuan Pembelajaran 1Mahasiswa Mampu untuk:Memahami sumber dana internal dan eksternalMemahami bauran pembiayaan yang cenderung digunakan perusahaan Menjelaskan mengapa pasar keuangan timbul Menjelaskan komponen sistem pasar keuanganMemahami peran bankir investasi dalam perolehan modal Membedakan antara penawaran terbatas dan penawaran umum#IIS2Page #Pokok Bahasan 1Sumber dana internal dan eksternalBauran sekuritas perusahaan yang dijual di pasar modalMengapa pasar keuangan munculPembiayaan perusahaanKomponen sistem pasar keuanganBankir investasiPenawaran terbatas dan Penawaran umum#IIS3Page #Tujuan Pembelajaran 2Mahasiswa mampu untuk: Memahami perbedaan antara risiko keuangan dan risiko bisnisMenggunakan teknik analisis titik impas untuk berbagai jenis analisisMembedakan konsep keuangan dari leverage operasi, leverage keuangan, dan leverage gabunganMenghitung degree of operating leverage, financial leverage, dan combined leverage

#IIS4Page #Pokok Bahasan 2Risiko bisnis dan keuanganAnalisis titik impasOperating leverageFinancial leverageKombinasi operating leverage dan financial leverage

#IIS5Page #Q: What are SECURITIES?A: Financial Assets that Investors purchase hoping to earn a high rate of return.#IIS6Page #Types of SecuritiesTreasury Bills and Treasury BondsMunicipal BondsCorporate BondsPreferred StocksCommon Stocks

Which of these are RISKY?Which promise HIGH RETURNS?Is there a relationship between RISK and RETURN?#IIS7Page #Corporate FinancingSourcesFrom 1999 through 2001, capital has been raised through the following sources:

Corporate Bonds and Notes76.9%Equities23.1%#IIS8Page #Movement of SavingsDirect Transfer of Fundscashsecurities

saverfirm#IIS9Page #Movement of SavingsIndirect Transfer using Investment Banker

securitiesfundsfundssecuritiessaverinvestmentbankerfirm#IIS10Page #Movement of SavingsIndirect Transfer using a Financial Intermediary

funds

intermediarysecuritiesfundsfirmsecuritiesfinancialintermediaryfirm

saver#IIS11Page #Financial Market ComponentsPublic OfferingFirm issues securities, which are made available to both individual and institutional investors.Private PlacementSecurities are offered and sold to a limited number of investors.

#IIS12Page #Financial Market ComponentsPrimary MarketMarket in which new issues of a security are sold to initial buyers.Secondary MarketMarket in which previously issued securities are traded.

#IIS13Page #Financial Market ComponentsMoney MarketMarket for short-term debt instruments (maturity periods of one year or less).Capital MarketMarket for long-term securities (maturity greater than one year).

#IIS14Page #Financial Market ComponentsOrganized ExchangesBuyers and sellers meet in one central location to conduct trades.Over-the-Counter (OTC)Securities dealers operate at many different locations across the country.Connected by Nasdaq system (National Association of Securities Dealers Automated Quotation system).#IIS15Page #Investment BankingHow do investment bankers help firms issue securities?

Underwriting the issue.Distributing the issue.Advising the firm.

#IIS16Page #Distribution Methods Negotiated PurchaseIssuing firm selects an investment banker to underwrite the issue.The firm and the investment banker negotiate the terms of the offer.Competitive BidSeveral investment bankers bid for the right to underwrite the firms issue.The firm selects the banker offering the highest price. #IIS17Page #Distribution Methods Best EffortsIssue is not underwritten.Investment bank attempts to sell the issue for a commission. Privileged SubscriptionInvestment banker helps market the new issue to a select group of investors.Usually targeted to current stockholders, employees, or customers.#IIS18Page #Distribution Methods Direct SaleIssuing firm sells the securities directly to the investing public.No investment banker is involved. #IIS19Page #Stock Issue Example:Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What type of issue is this?Its a negotiated purchase.#IIS20Page #Stock Issue Example:Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. How many shares will be sold?$100,000,000 / $20 = 5 million new shares of common stock.#IIS21Page #Stock Issue Example:Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the flotation costs?Underwriting spread: 2% of $100 million = $2 million.Issuing costs: printing and engraving costs; legal, accounting, and trustee fees.#IIS22Page #Stock Issue Example:Our firm needs to raise approximately $100 million for expansion. Our stock price is $20. We Select Merrill Lynch to underwrite the issue for a 2% underwriting spread. What are the risks?The investment bank accepts the risk of being able to sell the new stock issue for $20 per share. If the stock price falls, the investment bank could lose money.#IIS23Page #Regulations:The Primary MarketThe Securities Act of 1933 Firms register with the Securities Exchange Commission (SEC). SEC has 20 days to review.SEC may ask for more information.The firm cannot solicit buyers during the review period but can advertise.#IIS2448Page #Regulations:The Secondary MarketThe Securities Exchange Act of 1934Established the SEC.Exchanges must register with SEC.Company information must be available to the public.Insider trading is regulated.#IIS2554Page #Regulations:Recent DevelopmentsSecurities Acts Amendments of 1975Created National Market System.Eliminated fixed brokerage commissions.SEC Rule 415Allows Shelf Registration#IIS2654Page #Operating LeverageFinancial LeverageChapter 15 Analysis and Impact of Leverage#IIS27Page #

What is Leverage?#IIS28Page #

What is Leverage?#IIS29Page #Two concepts that enhance our understanding of risk...1) Operating Leverage - affects a firms business risk.

2) Financial Leverage - affects a firms financial risk.#IIS30Page #Business RiskThe variability or uncertainty of a firms operating income (EBIT).#IIS31Page #Business RiskThe variability or uncertainty of a firms operating income (EBIT).FIRMEBITEPSStock-holders#IIS32Page #Business RiskAffected by:Sales volume variabilityCompetitionProduct diversificationOperating leverageGrowth prospectsSize#IIS33Page #Operating LeverageThe use of fixed operating costs as opposed to variable operating costs.A firm with relatively high fixed operating costs will experience more variable operating income if sales change.#IIS34Page #

EBITOperatingLeverage#IIS35Page #Financial RiskThe variability or uncertainty of a firms earnings per share (EPS) and the increased probability of insolvency that arises when a firm uses financial leverage.#IIS36Page #Financial RiskThe variability or uncertainty of a firms earnings per share (EPS) and the increased probability of insolvency that arises when a firm uses financial leverage.FIRMEBITEPSStock-holders#IIS37Page #Financial LeverageThe use of fixed-cost sources of financing (debt, preferred stock) rather than variable-cost sources (common stock).#IIS38Page #

EPSFinancialLeverage#IIS39Page #Breakeven AnalysisIllustrates the effects of operating leverage.Useful for forecasting the profitability of a firm, division, or product line.Useful for analyzing the impact of changes in fixed costs, variable costs, and sales price.#IIS4012Page #Quantity$Total Revenue#IIS41Page #CostsSuppose the firm has both fixed operating costs (administrative salaries, insurance, rent, property tax) and variable operating costs (materials, labor, energy, packaging, sales commissions).#IIS42Page #Quantity{$Total RevenueTotal CostFCQ1+-}EBIT#IIS43Page #Quantity{$Total RevenueTotal CostFCBreak-evenpointQ1+-}EBIT#IIS44Page #Operating LeverageWhat happens if the firm increases its fixed operating costs and reduces (or eliminates) its variable costs?#IIS45Page #Quantity{$Total RevenueTotal Cost= FixedFCBreak-evenpoint}Q1+-EBIT#IIS46Page #

With high operating leverage, an increase in sales produces a relatively larger increase in operating income.#IIS47Page #Quantity{$Total RevenueTotal Cost= FixedFCBreak-evenpoint}Q1+-EBIT#IIS48Page #Quantity{$Total RevenueTotal Cost= FixedFCBreak-evenpoint}Q1+-EBITTrade-off: the firm hasa higher breakeven point. If sales are not high enough, the firm will not meet its fixedexpenses!#IIS49Page #Breakeven point (units of output)

QB = breakeven level of Q.F = total anticipated fixed costs.P = sales price per unit.V = variable cost per unit.Breakeven CalculationsQB = FP - V#IIS50Page #Breakeven point (sales dollars)

S* = breakeven level of sales.F = total anticipated fixed costs.S = total sales.VC = total variable costs.Breakeven CalculationsS* = F VC S1 -#IIS51Page #Analytical Income Statement sales- variable costs- fixed costs operating income- interest EBT- taxes net income#IIS52Page #Degree of Operating Leverage (DOL)Operating leverage: by using fixed operating costs, a small change in sales revenue is magnified into a larger change in operating income.

This multiplier effect is called the degree of operating leverage.#IIS53Page #DOLs = % change in EBIT% change in saleschange in EBIT EBITchange in sales sales=Degree of Operating Leveragefrom Sales Level (S)#IIS54Page #If we have the data, we can use this formula:Degree of Operating Leveragefrom Sales Level (S) Q(P - V) Q(P - V) - F=DOLs = Sales - Variable Costs EBIT#IIS55Page #What does