Scribd Logo
Upload

Welcome to Scribd!

  • Financing Corporate Growth

    Uploaded by

    Arturo Daniel González González
    3 views17 pages
    Articulo de ingenieria economica

    Original Title

    Financing Corporate Growth (1)

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    Articulo de ingenieria economica

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    3 views17 pages

    Financing Corporate Growth

    Uploaded by

    Arturo Daniel González González
    Articulo de ingenieria economica

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 17
    FINANCING CORPORATE GROWTH ing fics. ‘Broadly speaking, hare are renbasic appecacly i the valve of the sfor sing Snares tose eras pl fin. Gebtolders, sockholers, and others). The first Spproach nies the size ofthe cash flow pie tobe in- Scio so thar the peincpal second approach foses on. ays in which seme policy am ierease te size ofthe value pie by Bradford Cornell, University of California, Los Angeles, and Alan C. Shapiro, University of Southern California ‘pv atlecting operating.and investment decisions. Un- isthe view data company isa "ying together ‘ertying this: disparate ur, we turn in Section 3 to the Issue of what con szinues a growth company. Sections 4 and 5 addvess the main questions of the paper: How ace grovsh Smmponies polgoe: scaly ven tee ec acacesietks, what financial: manogemen 1th niques are best suited for such companies? ‘SLICING THE PIE Eyea if corporate operating cash flow is una n_feced by finat “al policy, It may be possible wo sell aims wo a given cash flow pie at a higher aggregate price by cleverly packaging these claims. In this ‘sense, Corporate finance is analogous to marketing. The firm needs money to finance furure invesume moleod of betng, Con te. cca aletler price ou tegoctageg acinrnants rove of HE GIS Od Weveate Con — terol eetee Flom he enle of These nigtshay be mereasadk f COO" —feduce, Projects. Instead of selling some of is existing assers 4 raise the required funds, ic will sell the rights 10 the fumre cash flows generated by its current and Prospective projec. It can sell these rights direcly and become an allequity financed firm. Bur the firm. ‘may geca bemer price for the rights rots funare cash flows by repackaging these rights before selling them to the investing public. ‘There are peo basic sitions in which such repackaging may add w firm valne. Firs, since differ- ‘ent securities are taxedin different ways, repackaging can potendially reduce the pie and thereby increase the cash flow arailable for ‘eventual distribution to investors. Second, toral reve~ from the Sale ofrightsto the pie may be increased! Securicies can be devised for which specific in- vvestars are. willing 10 pay a higher peices Shere-are foun circumstances in. which investors may pay more in the agaregate for claims to the cashflow pie: (1) tbe ‘securities are. bener designed. w meet the special Deeds and desires ofa particular class of kaveszors;(2) the. securities are more liquid; (3) the securities fe- duce transaction cost; OF (4) the Security stoctize reduces the “credibility gap’>berween management and pocential investors that exists whenever compa seducing aftereax financing cos by reducing the ‘governments share of the. cash flow pia. Most now bly, many firms consider debx financing to be less expensive than equity Anancing because interest payments are tax deductible whereas dividends are [pad out of after-tax income ‘As Merton Miller has noved, however, his com- parison is misleading for two reasons? First, it {gnares pemonal taxes. Second, icznores the supply ‘response of corporations to potential tax arbitrage. In the absence of any restrictions, the supply of cor- porate debe can be expected to rise as long a8 corpo- ‘ate debt is Jess expensive than equity. As ihe supply (of debs rises, the veld on this debt aust increase in ‘order to atract investors in progressively higher tax ‘brackets. This process conrinves unril the ax rate for the marginal debeholder equals the marginal corpo- saute Mh Da a Ra pre fm share of the » ‘ane tax rate. Ar that point, there is no longer a corpo- rave tax incentive for issuing more debt ‘This process ilhastrates a key insight that under- lies Miller's argument: The supply of securities in the casital markers is almost infinitely elastic. As soon as there is a small advancage wo issuing one type of sec {sty rather than another, aler financial managers and invesement bankers quickly aher their behavior to PeGlic from this discrepancy. They will conriqve 10 «issue the cheaper security until the discrepancy dis- ‘a. pears, For this reason, oppormiities 10 create tal ‘ve through the issuance of new seaities are small ‘ated unlikely w persist. ‘Onlyin rare instances will arex advantage persist “ar the margin.” The example of zero coupon bonds illustrates one such case In 1982, PepsiCo issued the first longterm, zero-coupon bond. Albough they, have since becomea staple of corpocare finance, zer0- coupon bonds initially were astariing innovation. Ze- 10s dont pay ineres, butare sold ata deep discount rom par. For example, the price on PepsiCo's 30-year ‘bonds was around 360 for each $1,000 face amount of the bonds. Investoes' gains come from the difference Dexween the discounted price and the face valve they receive at manurky. ‘These securites appeal uo those investors who like to be cermin of their longterm reuurn. The ocked-in rerum means that tavestors know the mans- rityvalue ofthe investment, an important considera- tion for pension funds and other buyers who have fired fueure commitments to meet. Normal bonds ‘dni provide that certainty, because the rate at which ¢-xpons can be reinvested is unknown at the time of {sive But despite the potential market for such boeds, they did noc exist until PepsiCo’s 1982 issue. ‘The pent-up demand for its $850 million face value offering gave PepsiCo an extraordinarily low cos offunds. The net borrowing costo the company ‘was under 10 percent, almost four percenage potns Jower than the yield at thar time on USS. Treasury se- curities of the same mamurity. Bur zero-coupon bonds did noc remain such a low-cost source of funds for long. Once firms saw these low vields, the ‘supply of zero-coupon debt expanded rapidly, In ad- dion, clever Wall Street firms discovered bow 1 manufacture zeros from existing bonds. They bought Treasury bonds, stripped the coupons from the bonds, repackaged the coupons, and sold the rar oncnletele ics, ects ur contellyghts to folute ch tous - These 1gnt 2D. 9 m tedoes aes Prone, cork by EULNG the gouormenh! chive of Be Ch spe Whe sgt of expert tA ome. Ye ers REBT then equlpmerme Jorpcckdle tise om lenges cotpote bb) ‘coupons and the principal separately as 2 series of nancial markets, the government will evermually ‘annulties and zero-coupon bonds. ume the law. ‘The increase in the supply relaive to the More limined tax arbitrage, however, may per- demand for zeros resuked in a jomp in their re- sist for some time. For example, companies with tax quired yields, negating their previous com advan- losses or excess tax credits can sell preferred s1ock ‘age. But the tax advantage—one which is associated to other corporations and thereby reduce investor ‘with any original issue discount debe (OID)— . exes wihout a corresponding increase in their remained. The ex advantage wo a firm from issuing "taxes. The reason is that Corporace investors can ex- eros rather than current coupon debt stems from clude from taxable income 70 percent of the pre- the tax provision thar allows companies wo amortize ferred (or common) dividends they receive This as \meses the amount ofthe original discount from mcans that a corporate investor in the 34 percent [Pat over the life of the bond. The firm benefits by bracker faces an effecive tax rte of only 10.2 percent Teceivinga currenttax write-off for afumare expense. (3 X 34%) on preferred dividends As a result, cor- ‘By comast, if it isnues current coupon debt, the porate investors are willing to aocept 2 lower yield Arm's ux writeoff and expense occur simulianeous- 6a preferred siock than on comparable debs secur ly. Thetax advantage from OIDs, which s maximized ves Hence, companies in low tax brackers (who are bby iseuing zero-coupon bonds, translates inmo a re- unable to snake full use of the interest tax write-off)

    You might also like