Chapter 14 - Raising Capital
in the Financial Markets
Chapter 15 – Analysis and
Impact of Leverage
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Tujuan Pembelajaran 1
Mahasiswa Mampu untuk:
Memahami sumber dana internal dan eksternal
Memahami bauran pembiayaan yang cenderung
digunakan perusahaan
Menjelaskan mengapa pasar keuangan timbul
Menjelaskan komponen sistem pasar keuangan
Memahami peran bankir investasi dalam perolehan
modal
Membedakan antara penawaran terbatas dan penawaran
umum
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Pokok Bahasan 1
Sumber dana internal dan eksternal
Bauran sekuritas perusahaan yang dijual di
pasar modal
Mengapa pasar keuangan muncul
Pembiayaan perusahaan
Komponen sistem pasar keuangan
Bankir investasi
Penawaran terbatas dan Penawaran umum
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Tujuan Pembelajaran 2
Mahasiswa mampu untuk:
Memahami perbedaan antara risiko keuangan dan
risiko bisnis
Menggunakan teknik analisis titik impas untuk berbagai
jenis analisis
Membedakan konsep keuangan dari leverage operasi,
leverage keuangan, dan leverage gabungan
Menghitung degree of operating leverage, financial
leverage, dan combined leverage
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Pokok Bahasan 2
Risiko bisnis dan keuangan
Analisis titik impas
Operating leverage
Financial leverage
Kombinasi operating leverage dan financial
leverage
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Q: What are SECURITIES?
A: Financial Assets that
Investors purchase hoping to
earn a high rate of return.
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Types of Securities
Treasury Bills and Treasury Bonds
Municipal Bonds
Corporate Bonds
Preferred Stocks
Common Stocks
Which of these are RISKY?
Which promise HIGH RETURNS?
Is there a relationship between RISK
and RETURN?
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Corporate Financing
Sources
From 1999 through 2001, capital has been
raised through the following sources:
Corporate Bonds and Notes 76.9%
Equities
23.1%
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Movement of Savings
Direct Transfer of Funds
cash
firm
saver
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securities
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Movement of Savings
Indirect Transfer using Investment Banker
funds
funds
saver
investment
banker
securities
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firm
securities
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Movement of Savings
Indirect Transfer using a Financial Intermediary
funds
saver
funds
financial
intermediary
intermediary
securities
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firm
firm
securities
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Financial Market Components
Public Offering
Firm issues securities, which are
made available to both individual
and institutional investors.
Private Placement
Securities are offered and sold to a
limited number of investors.
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Financial Market Components
Primary Market
Market in which new issues of a
security are sold to initial buyers.
Secondary Market
Market in which previously issued
securities are traded.
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Financial Market Components
Money Market
Market for short-term debt
instruments (maturity periods of
one year or less).
Capital Market
Market for long-term securities
(maturity greater than one year).
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Financial Market Components
Organized Exchanges
Buyers and sellers meet in one central
location to conduct trades.
Over-the-Counter (OTC)
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Securities dealers operate at many
different locations across the country.
Connected by Nasdaq system (National
Association of Securities Dealers
Automated Quotation system).
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Investment Banking
How do investment bankers help
firms issue securities?
Underwriting the issue.
Distributing the issue.
Advising the firm.
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Distribution Methods
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Negotiated Purchase
Issuing firm selects an investment
banker to underwrite the issue.
The firm and the investment banker
negotiate the terms of the offer.
Competitive Bid
Several investment bankers bid for the
right to underwrite the firm’s issue.
The firm selects the banker offering
the highest price.
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Distribution Methods
Best Efforts
Issue is not underwritten.
Investment bank attempts to sell the
issue for a commission.
Privileged Subscription
Investment banker helps market the
new issue to a select group of investors.
Usually targeted to current
stockholders, employees, or customers.
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Distribution Methods
Direct Sale
Issuing firm sells the securities directly
to the investing public.
No investment banker is involved.
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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?
It’s a negotiated purchase.
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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.
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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.
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What are the flotation costs?
Underwriting spread: 2% of $100
million = $2 million.
Issuing costs: printing and engraving
costs; legal, accounting, and trustee fees.
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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.
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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.
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Regulations:
The Primary Market
The 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.
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Regulations:
The Secondary Market
The Securities Exchange Act of 1934
Established the SEC.
Exchanges must register with SEC.
Company information must be
available to the public.
Insider trading is regulated.
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Regulations:
Recent Developments
Securities Acts Amendments of 1975
Created National Market System.
Eliminated fixed brokerage
commissions.
SEC Rule 415
Allows Shelf Registration
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Chapter 15 – Analysis and
Impact of Leverage
Operating Leverage
Financial Leverage
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What is Leverage?
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What is Leverage?
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Two concepts that enhance
our understanding of risk...
1) Operating Leverage - affects a
firm’s business risk.
2) Financial Leverage - affects a
firm’s financial risk.
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Business Risk
The variability or uncertainty of a
firm’s operating income (EBIT).
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Business Risk
The variability or uncertainty of a
firm’s operating income (EBIT).
EBIT
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FIRM
EPS
Stockholders
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Business Risk
Affected by:
Sales volume variability
Competition
Product diversification
Operating leverage
Growth prospects
Size
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Operating Leverage
The 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.
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EBIT
Operating
Leverage
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Financial Risk
The variability or uncertainty of
a firm’s earnings per share (EPS)
and the increased probability of
insolvency that arises when a
firm uses financial leverage.
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Financial Risk
The variability or uncertainty of
a firm’s earnings per share (EPS)
and the increased probability of
insolvency that arises when a
firm uses financial leverage.
EBIT
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FIRM
EPS
Stockholders
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Financial Leverage
The use of fixed-cost sources of
financing (debt, preferred stock)
rather than variable-cost sources
(common stock).
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EPS
Financial
Leverage
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Breakeven Analysis
Illustrates 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.
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Total Revenue
$
Quantity
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Costs
Suppose the firm has both fixed
operating costs (administrative
salaries, insurance, rent, property
tax) and variable operating costs
(materials, labor, energy,
packaging, sales commissions).
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Total Revenue
Total Cost
$
+
} EBIT
FC {
Q1
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Quantity
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Total Revenue
Total Cost
$
+
} EBIT
FC {
Break-even
point
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Q1
Quantity
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Operating Leverage
What happens if the firm
increases its fixed operating
costs and reduces (or
eliminates) its variable costs?
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Total Revenue
$
+
{
FC
Total Cost
= Fixed
-
Break-even
point
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}
EBIT
Q1
Quantity
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With high operating leverage,
an increase in sales
produces a relatively larger
increase in operating
income.
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Total Revenue
$
+
{
FC
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}
EBIT
Total Cost
= Fixed
Breakeven
point
Q1
Quantity
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Total
Revenue
Trade-off:
the firm has
a higher breakeven
EBIT
point. If sales
are not
+
high enough, the firm
will not meet
its fixed
Total
Cost
expenses!
= Fixed
$
{
FC
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}
Breakeven
point
Q1
Quantity
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Breakeven Calculations
Breakeven point (units of output)
QB =
F
P-V
QB = breakeven level of Q.
F = total anticipated fixed costs.
P = sales price per unit.
V = variable cost per unit.
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Breakeven Calculations
Breakeven point (sales dollars)
S* =
F
VC
1S
S* = breakeven level of sales.
F = total anticipated fixed costs.
S = total sales.
VC = total variable costs.
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Analytical Income Statement
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sales
variable costs
fixed costs
operating income
interest
EBT
taxes
net income
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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.
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Degree of Operating Leverage
from Sales Level (S)
DOLs =
=
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% change in EBIT
% change in sales
change in EBIT
EBIT
change in sales
sales
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Degree of Operating Leverage
from Sales Level (S)
If we have the data, we can use this formula:
Sales - Variable Costs
DOLs =
EBIT
=
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Q(P - V)
Q(P - V) - F
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What does this tell us?
If DOL = 2, then a 1% increase in
sales will result in a 2% increase in
operating income (EBIT).
Sales
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EBIT
EPS
Stockholders
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Degree of Financial
Leverage (DFL)
Financial leverage: by using fixed
cost financing, a small change in
operating income is magnified into
a larger change in earnings per
share.
This “multiplier effect” is called
the degree of financial leverage.
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Degree of Financial Leverage
% change in EPS
% change in EBIT
DFL =
=
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change in EPS
EPS
change in EBIT
EBIT
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Degree of Financial Leverage
If we have the data, we can use this
formula:
EBIT
DFL =
EBIT - I
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What does this tell us?
If DFL = 3, then a 1% increase in
operating income will result in a 3%
increase in earnings per share.
Sales
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EBIT
EPS
Stockholders
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Degree of Combined
Leverage (DCL)
Combined leverage: by using operating
leverage and financial leverage, a small
change in sales is magnified into a larger
change in earnings per share.
This “multiplier effect” is called the
degree of combined leverage.
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Degree of Combined Leverage
DCL = DOL x DFL
% change in EPS
=
% change in Sales
=
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change in EPS
EPS
change in Sales
Sales
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Degree of Combined Leverage
If we have the data, we can use this
formula:
DCL =
=
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Sales - Variable Costs
EBIT - I
Q(P - V)
Q(P - V) - F - I
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What does this tell us?
If DCL = 4, then a 1% increase in
sales will result in a 4% increase in
earnings per share.
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What does this tell us?
If DCL = 4, then a 1% increase in
sales will result in a 4% increase in
earnings per share.
Sales
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EBIT
EPS
Stockholders
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In-class Project:
Based on the following information on
Levered Company, answer these
questions:
1) If sales increase by 10%, what should
happen to operating income?
2) If operating income increases by 10%,
what should happen to EPS?
3) If sales increase by 10%, what should be
the effect on EPS?
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Levered Company
Sales (100,000 units)
Variable Costs
Fixed Costs
Interest paid
Tax rate
Common shares outstanding
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$1,400,000
$800,000
$250,000
$125,000
34%
100,000
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Levered Company
Sales
Operating
Income
Operating
leverage
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EPS
Financial
leverage
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Degree of Operating Leverage
from Sales Level (S)
Sales - Variable Costs
DOLs =
EBIT
=
1,400,000 - 800,000
350,000
= 1.714
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Levered Company
17.14%
10%
Sales
Operating
Income
EPS
Operating
leverage
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Degree of Financial Leverage
EBIT
DFL =
EBIT - I
=
350,000
225,000
= 1.556
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Levered Company
15.56%
10%
Sales
Operating
Income
EPS
Financial
leverage
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Degree of Combined Leverage
DCL =
=
Sales - Variable Costs
EBIT - I
1,400,000 - 800,000
225,000
= 2.667
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Levered Company
26.67%
10%
Sales
Operating
Income
Operating
leverage
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EPS
Financial
leverage
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Levered Company
10% increase in sales
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Sales (110,000 units)
Variable Costs
Fixed Costs
EBIT
Interest
EBT
Taxes (34%)
Net Income
EPS
1,540,000
(880,000)
(250,000)
410,000 ( +17.14%)
(125,000)
285,000
(96,900)
188,100
$1.881 ( +26.67%)75
Penutup
Tugas
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