Introduction to Corporate Financing
Dr Yifan Zhou
Introduction to Corporate Financing
• Introduction to corporate financing
• Internal financing
• External financing
Introduction to Corporate Financing
• A firm typically has a number of options to
finance itself, and how a firm chooses to finance
itself can determine whether the firm stays
liquid long enough to see its long-term plans
materialize.
Introduction to Corporate Financing
Firm financing decision is important:
✓ The complex nature of a firm’s assets and liabilities
✓ Understanding the financing options available to a firm
Introduction to Corporate Financing
Financing decisions based on:
➢ costs and risks to the company
➢ returns and risks to the creditor or investor
Introduction to Corporate Financing
Financing decisions based on:
• market conditions
• regulatory requirements
• services of agents, brokers, dealers, and financial
intermediaries working in the market
Internal funds
Financing
Decisions
External funds
Introduction to Corporate Financing
Most of the fund for the firm is generate from?
• Internal or external funding sources?
•
The U S corporations get the cash to pay for these investments.
•
Most of the cash is generated internally.
Funding sources
Internal financing
Internal Financing:
Companies of varying sizes and profitability can,
in principle, generate internal financing and
liquidity from their short-term operating activities
in several ways.
Internal financing
Internal Financing is generating from
• after-tax operating cash flow
• extending a company’s payables period
• reducing its receivables period
Internal financing
Internal financing of firm is generating from
• shortening its cash conversion cycle
• converting liquid assets such as receivables
inventories, and marketable securities to
cash.
Internal financing
Operating Cash Flows
• after-tax operating cash flows less interest
and dividend payments (adjusted for taxes)
• equal to net income plus depreciation
minus dividend payments.
Internal financing
Operating Cash Flows
• A firm with higher, more predictable
after-tax operating cash flows has greater a
bility to finance itself using internal means.
Internal financing
Accounts payable
• company’s suppliers of goods/services that
have not been paid.
• arise from trade credit: delaying the date on
which payment is made.
Internal financing
Accounts payable
• company’s suppliers of goods/services that
have not been paid.
• arise from trade credit: delaying the date on
which payment is made.
Internal financing
Trade credit
• might involve a delay of payment with a
discount for early payment.
• arise from trade credit: delaying the date on
which payment is made.
Internal financing
Trade credit
• For example, the terms “2/10, net 30”
indicate that a 2% discount is available if
account is paid within 10 days; otherwise,
full amount is due by the 30th day.
Internal financing
Accounts receivable
are the opposite of accounts payable and
represent amounts owed by the firm’s
customers.
Internal financing
Liquid Assets: Inventory and Marketable Securities
✓is a current asset on the balance sheet.
• raw materials
• work-in-progress in production
• finished goods waiting to be sold
Internal financing
Inventory
an efficient company holds as little inventory
as is necessary and sells or turns over
inventory as quickly as possible.
Internal financing
Inventory
an efficient company holds as little inventory
as is necessary and sells or turns over
inventory as quickly as possible.
Internal financing
Marketable securities
✓are financial instruments: stocks and bonds
✓can be quickly sold and converted to cash
Internal financing
Marketable securities
✓ are listed as a current asset
✓ firm intends to liquidate them within a year or
if the security has less than a year in maturity
Internal financing
Marketable securities
✓ are listed as a current asset
✓ firm intends to liquidate them within a year or
if the security has less than a year in maturity
External Financing
Financial Intermediaries
bank and non-bank lenders, can also be a
means to finance working capital.
• uncommitted bank lines of credit
• committed bank lines of credit
• revolving credit agreements
External Financing
Lines of Credit
Uncommitted lines :least reliable form of bank
borrowing.
A bank can offer an uncommitted line of credit
but reserves the right to refuse to honor any
request for use of the line.
External Financing
Committed (regular) lines of credit
➢banks might be unwilling to lend
(financial market stress)
➢No require for to compensation
External Financing
Committed (regular) lines of credit:
• up to a pre-specified amount
• most companies refer to as regular lines of credit
• more reliable than uncommitted lines
External Financing
Committed (regular) lines of credit:
• lines of credit are in effect for 364 days
• minimizing bank capital requirements
External Financing
Committed (regular) lines of credit:
• unsecured and pre-payable without penalty
• borrowing rate paid negotiated
• bank’s prime rate/money market rate plus a spread
• spread is dependent on the firm’s creditworthiness
External Financing
Revolving credit agreements
• in effect for multiple years and can have
optional medium-term loan features
• draw down and pay back amounts periodically
External Financing
Loans and Factoring
Secured (“asset-based”) loans
➢ lender requires collateral
• fixed asset
• high-quality receivables
• inventory
• marketable securities
External Financing
Loans and Factoring
Secured (“asset-based”) loans
➢ lender requires collateral
• fixed asset
• high-quality receivables
• inventory
• marketable securities
External Financing
Assignment of accounts receivable
➢ use of these receivables as collateral for a loan
➢ company can securitize its receivables
External Financing
Assignment of accounts receivable
securitize its receivables
selling its accounts receivable
special purpose vehicle (SPV)
in turn issues a bond, backed by receivables
sold to investors
External Financing
Factoring arrangement
➢ company shifts the credit-granting and collection
process to the lender or factor.
➢ cost of this credit depends on the credit quality of
the accounts and the costs of collection.
External Financing
Web-based lenders and non-bank lenders
Web-based lenders operate primarily on the
internet, offering loans in relatively small amounts,
typically to small businesses in need of cash.
External Financing
Web-based lenders and non-bank lenders
Non-bank lenders
• lend to businesses
• only make loans
• provide specific financial services to targeted
consumers
External Financing
Capital Markets
1. Short-Term Commercial Paper
2. A company sells, or issues, commercial paper (also ref
erred to
3. as promissory notes or bills of exchange) directly to in
vestors or through dealers.
4. Long-Term Debt
5. Common Equity
External Financing
Capital Markets
1. Short-Term Commercial Paper
2. Long-Term Debt
3. Common Equity
External Financing
Short-Term Commercial Paper
A company sells, or issues,
commercial paper
(promissory notes or bills of exchange)
directly to investors or through dealers
External Financing
Short-Term Commercial Paper
• a few days or up to 270 days
• most commercial paper is unsecured, with no
specific collateral
External Financing
Long-Term Debt
Public debt
• negotiable and approved for sale on open markets
• transferable and can be sold to another party
External Financing
Long-Term Debt
Private debt
• not trade on a market
• less liquid more difficult for the holder to sell.
External Financing
Long-Term Debt
Private debt
• not negotiable :
✓ savings bonds
✓ certificates of deposit
• private debt issued by businesses can usually be sold by
one party to another.
External funds : Debt and Equity
External funds : Debt and Equity
Introduction to Corporate Financing
• Introduction to corporate financing
• Internal financing
• External financing