266218904

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ADOPT A LOGICAL FLOW

put yourself in the shoes (place) of those businessmanaers !ho !oul" be atten"in the seminar

They are busy but professional people # you mustconsi"er the le$el of information an" !hich pointsmay nee" further e%planation an" support

&upport can be for e%ample'

%pan"in further a bullet point by e%plainine%actly !hat is meant by the statement

Pro$i"in a practical e%ample !hich the manaerscoul" i"entify !ith'

Pro$i"in some empirical (real !orl")e$i"ence # research fin"ins* O+ a company !hich"emonstrates the point (neati$ely or positi$ely)

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ADOPT A LOGICAL FLOW Present information in a clearly structure" (oranise")

!ay , so one point naturally follo!s another* buil"in upthe information

This !ill allo! you to selecti$ely intro"uce any theory*mo"els or other information you consi"er rele$ant

A-D T. I-FO+/ATIO- ADD& 0AL122 # A-&W+I-G T.-D& OF T. /A-AG+& ATT-DI-G T. &/I-A+

ID-TIF3 AT T. O1T&T (&TA+T) OF T. POW+POI-TP+&-TATIO- , T. FO+/AT 3O1 WILL 4 ADOPTI-G

FO+ 5A/PL # AT T. 0+3 4A&IC 3O1 CO1LD C.OO&T6 5PLAI- T.AT'

FI+&TL3* T. P+&-TAIO- WILL ID-TIF3 ALL OF T.4-FIT& A-D T.- FOLLOWD 43 T. +I&7&A&&OCIATD WIT. CO+PO+AT D4T

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TA&7 A +AD A-D A-AL3& W.AT I& 4I-G &TATD I- T. TA&7 A

73 # IT I& &TATD I- T. 81&TIO- T.AT T. CO/PA-I&+P+&-TD AT T. &/I-A+ WILL .A0 5I&TI-G&TA4LI&.D CAPITAL &T+1CT1+&

CO-TAI-I-G A /I5T1+ OF 4OT. P+I0AT D4T A-D 81IT3

T.I-722

W.3 /A3 T.I& 5I&TI-G CAPITAL &T+1CT1+ .A0 4-ADOPTD 43 T. I-DI0ID1AL CO/PA-I&9

FO+ T. FOLLOWI-G +A&O-&

a To attract a larer $olume of capital

b To limit "ilution of o!ners interest ($otin po!er for e%ample)

c APPL3I-G T. PO+TFOLIO T.O+3 TO'" Intro"uce "i$ersification

e TO +D1C T. CO&T

f &P+AD T. +I&7 , FI-A-CIAL +I&7

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&o !hat can !e ta:e from this

information9; The sub<ect area 4I-G 5A/I-D# is the

cost of capital

= PA+TIC1LA+L3 /A-AGI-G T. CO&T OF

T. CAPITAL> T.I& CO&T +//4+ is lin:e" to the

Weihte" a$erae cost of capital (WACC)

? A""itionally* the nee" to protect theinterest of e%itin o!ners , for e%ampletheir percentae of $otin rihts

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.OW CA- T.I& I-FO+/ATIO- 41&D9 It coul" focus your attention on the points to "ra! out

(stress) !hen i"entifyin the benefits A-D ris:s ofintro"ucin CO+PO+AT D4T

0ery briefly each@O+ <ust selecte" points from the

pre$ious list* (an" sho!n aain belo!) coul" bee%pan"e" upon

a To attract a larer $olume of capital

b To limit "ilution of o!ners interest ($otin po!er fore%ample)

c APPL3I-G T. PO+TFOLIO T.O+3 TO'" Intro"uce "i$ersification

e TO +D1C T. CO&T

f &P+AD A-3 +I&7 , FI-A-CIAL

. &ee ne%t sli"e as an e%ample

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For e%ample ,To re"uce the cost

%plain ho! cost can be re"uce" This coul" further be lin:e" to the nee" to use the

cost of capital as the "iscount rate !hen applyinin$estment appraisal

To ensure the pro<ect earns a positi$e -P0 an"sharehol"er !ealth

The cost of capital acts as a hur"leB

&tatin the a""itional support is a""ressin the nee"sof the au"ience an" "emonstratin your :no!le"e

+estrictin yourself to this format toether !ithsome reference to ris:s an" benefits !ill probablylimit you to a pass or == (see later sli"es for hiherle$el s:ills)

Let us continue to e%amine tas: a)

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Aain* P1T 3O1+&LF I- T. &.O& OF T. /A-AG+&ATT-DI-G T. &/I-A+

As: , WILL T.3 4-FIT F+O/ A LITTL 4AC7G+O1-DI-FO+/ATIO-9

&uch as'

A brief "efinition of a corporate "ebt

-otin that corporate "ebt is classifie" as public "ebt 7ey classifications of corporate "ebt e promissory (loan

)notes an" "ebentures

Di$ision into !holesale an" retail bon" an" statin !hichtype of in$estor "oes each apply

Corporate "ebt issue" in a similar !ay as euity e # onthe capital mar:et or by placins

1se of a"$isors * un"er!riters* financial institutions to sellbon"s other transaction costs (you can refer to thee%amples i$en in the uestion)

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W.AT A+ T.

4-FIT& OFCO+PO+AT D4T

I- T. FO+/ OF

4O-D&9 CA- W T.I-7 an"

&1GG&T9

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&1//A+3 OF 73 4-FIT& The company has some control o$er the cost OF T. D4T*

timin of repayments an" e%piry @re"emption "ate# This helps tolimit the financial ris: associate" !ith "ebt

+emember this refers to the ris: associate" !ith ser$icin the"ebt ( the annual coupon or interest payments payable incash )

An" eneratin the cash reuire" to repay the actual capitalborro!e" # at a future "ate

+emember the cost of "ebt is the annual return payable on thein"i$i"ual "ebt

Corporate "ebt referre" to as 4on"s are consi"ere" less ris:ythan euity # an" therefore the in$estor !ill accept a lo!er rate

of return The company can ta:e a"$antae of a rane of coupon rates e

"eep "iscount (maybe i"entify them )

&ome ta%ation shiel" is allo!able # but it can be uitecomplicate" to obtain (see ne%t sli"e) for e%amples'

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The ta%ation shiel" can be uite complicate" to

obtain as there are for e%ample'i Different rules for "ifferent types of capital

e%pen"iture an" the "ebt raise" to fun" this

ii Different rules for "ifferent business sectors(currently the me"ia an" creati$e sector in receipt

of enerous allo!ances)iii &ee !or" "ocument # source ./ customs an" e%cise

i$ &ome current information

$ Corporate bon"s particularly retail bon"s ha$e been

popular in recent years as they attract in$estors!ho reuire a reular income reater than a sa$insaccount

. (41T !ho !ill accept a lo!er return as bon"s seen asa less ris:y security (type of in$estment))

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Issuin corporate "ebt (!ith the e%ceptionof con$ertible bon"s) "oes not "iluteo!ners interest

COP+PO+AT D4T CA- 4 +&OLD O- T.&CO-DA+3 4O-D /A+7T # GI0I-GL81IDIT3 TO I-0&TO+

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I/PO+TA-T TO +//4+ T. CO-0+TI4L 4O-D Define an" e%plain

A""e" a"$antae # company can call for a con$ersion at atime !hich suits the company

+e"uces the nee" for reular cash outflo!s oncecon$erte"

Do lin: to effect on cost of capital an" spre"in ris:cost

4ut stress the future returns from the shares must be of$alue to the bon" hol"er especially !hen e%presse" in

present $alues The return must be at least eual to the opportunity cost #

e :eepin the bon" for the full perio" of the bon"

As: Woul" a calculation a"" $alue to your presentation ,

+//4+ W P+FO+/D A CALC1LATIO- I- AWO+7&.OP

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W.AT A+ T.

+I&7& CA- W T.I-7 9

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73 +I&7&

LGAL CO-T+ACT TO PA3 CO1PO-@I-T+&T A-D P+I-CIPL Intro"ucin corporate "ebt is increasin both the finaial ris<: an"

financial "istress The cost of euity an" "ebt may increase as a result

&C1+ITI&ATIO- OF A&&T& # The in$estor or trust fun"s secure can

the assets of the company in case the company "efaults on the "ebtThe assets !ill be sol" for cash # this applies to Debentures fore%ample

Corporate "ebt is T+1&T F1-D /A-AGD # +&T+ICTI0 CO0-A-T&can be applie" , LGALL3 +81I+D TO .O-O1+ T./

L&& CAPITAL GAI-& O- &CO-DA+3 /A+7T FO+ I-0&TO+

4O-D POP1LA+IT3 LI-7D TO P+FO+/A-C OF T. &TOC7 /A+7TA-D DI0ID-D PA3/-T&

I-C+A&I-G D4T L0L& +81I+& GOOD CA&. FLOW # I-C+A&&FI-A-CIAL +I&7 A-D FI-A-CIAL DI&T+&&

-OT +I&7 F+ FO+ I-0&TO+

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6btainin a hiher ra"e &ome remin"ers of the

information !hich .assome rele$ance be inclu"e"

Capital structure an"earin le$el is the area ofstu"y bein e%amine"

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to a""ress this as:'

What factors !ill a senior manaer be

concerne" !ith9 (!hen actin as responsibleaents9)

A-&W+ WILL T. I-T+OD1CTIO- OF A-3-W FI-A-C AFFCT A-3 OF T. FOLLOWI-G

The $alue of the company ,particularlyimportant

&harehol"er !ealth ma%imisation

The mar:et price of the company share

.o! can this be use" to ans!er the tas: a)9

It can enable you to pro$i"e a morecomprehensi$e ui"ance

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LT 1& CO-&ID+ T. 73 /A-AG/-TCO-C+-&

Is there an optimum capital structure9 Which achie$es the lo!est a$erae cost of

capital9

Will &.A+.OLD+ 0AL1 be affecte"9

CA- 3O1 4+IFL3 I-T+OD1C O+ +F+ TOT.O+3 &1C. A&'

T. TrADITIO-AL T.O+3

/ODIGLIA-I A-D /ILL+

OPTI/1/ CAPITAL &T+1CT1+ , in practice

WACC , /AT./ATICALL3 A-D@O+DIAG+A/ATICALL3 (& .A-DO1T)

C1++-T T.I-7I-G

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266218904

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