September 27, 2023

How much will a firm receive in net funding from a firm commitment underwriting of 300,000 shares priced to the public at $30 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.

Q1: An investor owns a bond selling for $5,000. This bond can be converted into 50 shares of stock that are currently selling for $82 per share. Should the investor convert his bond into shares? Explain why? [2 Mark]

Q2: What is the Expected return on the assets (Cost of capital ) of a firm with following data. [2 Marks]

Assets Value

100

Debt (D)

–

Equity (E)

Total Asset value

100

Firm Value

100

Expected Return on the debt (rdebt) = 8%

Expected Return on the Equity (requity) = 16%

Q3. How much will a firm receive in net funding from a firm commitment underwriting of 300,000 shares priced to the public at $30 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees. [2 Marks]

Q4. Explain the concept of Financial Distress and Financial Slack. Also write the benefits and drawbacks of Financial Slack. [2 Mark]

Q5. What is Underwriter Spread? Explain with example. Write down the steps followed in an IPO Flowchart.[2 Marks]

Requirements: 1200-1600

College of Administrative and Financial Sciences

Assignment 1

Corporate Finance (FIN-201)

Due Date: 07/10/2023 @ 23:59

For Instructor’s Use only

General Instructions – PLEASE READ THEM CAREFULLY

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Submissions without this cover page will NOT be accepted.

Q2: What is the Expected return on the assets (Cost of capital ) of a firm with following data. [2 Marks]

Expected Return on the debt (rdebt) = 8%

Expected Return on the Equity (requity) = 16%

Q4. Explain the concept of Financial Distress and Financial Slack. Also write the benefits and drawbacks of Financial Slack. [2 Mark]

Q5. What is Underwriter Spread? Explain with example. Write down the steps followed in an IPO Flowchart. [2 Marks]

13-2The WACC and Company ValuationThe required rate of return on a firm’s projects can be calculated using the weighted-average cost of capital. حجرملا ةفلكتلا طسوتم مادختساب ةكرشلا عيراشم ىلع بولطملا دئاعلا لدعم باسح نكميلاملا سأرل.The weighted-average cost of capital(WACC) is the after-tax return the company needs to earn in order to satisfy all its security holders. حجرملا لاملا سأر ةفلكت طسوتم(WACC) ىلإ ةكرشلا جاتحت يذلا ةبيرضلا دعب دئاعلا وهةيلاملا قارولأا يلماح عيمج ءاضرإ لجأ نم هبسك.

13-3Company Cost of CapitalCompany Cost of Capitalةكرشلا لام سأر ةفلكت•The opportunity cost of capital for the firm’s existing assets. The minimum acceptable rate of return when the firm expands by investing in average-risk projects.•ةكرشلل ةيلاحلا لوصلأل لاملا سأرل ةليدبلا ةصرفلا ةفلكت . دئاعلا لدعمل ىندلأا دحلا رطاخملا تاذ عيراشملا يف رامثتسلاا للاخ نم ةكرشلا عسوتت امدنع لوبقملاةطسوتملا.Capital Structureلاملا سأر لكيه•The mix of long-term debt and equity financing.•مهسلأا ليومتو لجلأا ةليوط نويدلا نم جيزم.Used to value new assets that have the same riskas the old ones.ةميدقلا لوصلأا رطاخم سفن اهل يتلا ةديدجلا لوصلأا مييقتل مدختست.

13-4Company Cost of CapitalThe company cost of capital is a weighted averageof returns demanded by debt and equity investors.مهسلأاو نويدلا يف نورمثتسملا اهبلطي يتلا دئاوعلل حجرم طسوتم يه ةكرشلا لام سأر ةفلكت.

13-5Company Cost of Capital: ExampleMacrosoft, Inc. has issued long-term bonds with a present value of $25 million and a yield of 8%. It currently has 12 million shares outstanding, trading at $20 each, offering an expected return of 14%. What is the firm’s cost of capital? ةكرش تردصأMacrosoft،Inc. ةيلاح ةميقب لجلأا ةليوط تادنس25 دئاعو رلاود نويلم8٪ . اًيلاح اهيدل12 رعسب اهنم لك لوادت متي ، مئاق مهس نويلم20 ةبسنب اًعقوتم اًدئاع رفوي امم ، اًرلاود14٪ . ةفلكت يه ام؟ةكرشلل لاملا سأر

13-6Weighted Average Cost of CapitalFor proper valuation we must value the firm’s after-taxcash flows.بئارضلا مصخ دعب ةكرشلل ةيدقنلا تاقفدتلا ردقن نأ بجي ، بسانملا مييقتلل.Why is it important to account for taxes?؟بئارضلا باسح مهملا نم اذامل

13-7Weighted Average Cost of CapitalThe WACCprovides a firm’s after-tax cost of capital. رفويWACC بئارضلا مصخ دعب ةكرشلا لام سأر ةفلكت.Where:Tc = The firm’s average tax rate

13-8Calculating WACCA firm’s WACC is calculated in 3 steps:1.Calculate the value of each security as a proportion of firm value.2.Determine the required rate of return on each security.3.Calculate a weighted average of the after-tax return on the debt and return on the equity. يف ةكرشلل يصخشلا كلاهتسلاا فيلاكت طسوتم باستحا متي3تاوطخ:ةكرشلا ةميق نم ةبسنك ةيلام ةقرو لك ةميق بسحا.ةيلام ةقرو لك ىلع بولطملا دئاعلا لدعم ديدحت.ةيكلملا قوقح ىلع دئاعلاو نيدلا ىلع ةبيرضلا دعب ام دئاعل حجرملا طسوتملا بسحا.

13-9Calculating WACC: ExampleWhat is the WACC for a firm with $30 million in outstanding debt with a required return of 8%, 8 million in equity shares outstanding trading at $15 each with a required return of 12%, and a tax rate of 35%? اهيدل ةكرشل ةبسنلاب لاملا سأر ةفلكتل حجرملا لدعملا وه ام30 بولطم دئاع عم ةقحتسملا نويدلا نم رلاود نويلم8 و ، ٪8 مهسلأا نم نييلام رعسب ةلوادتملا15 بولطم دئاع عم اهنم لكل اًرلاود12 ةبيرض لدعمو ، ٪35؟٪1.2.3.

13-10Calculating WACCIf there are 3 (or more) sources of financing, simply calculate the weighted-average after-tax return of each security type. كانه تناك اذإ3 رداصم(رثكأ وأ ) ةبيرضلا دعب رارقلإل حجرملا طسوتملا باسح ىوس كيلع امف ، ليومتللةيلاملا قارولأا عاونأ نم عون لكل.If the firm issues preferred stock:لضفم نوزخم رادصإب ةكرشلا تماق اذإ:

13-11Calculating WACC: ExampleConsider a firm with $8 million in outstanding bonds, $15 million worth of outstanding common stock, and $5 million worth of outstanding preferred stock. Assume required returns of 8%, 12%, and 10%, respectively, and a 35% tax rate. ةميقب ةقلعم تادنس اهيدل ةكرش يف ركف8 و ، رلاود نييلام15 و ، ةمئاقلا ةيداعلا مهسلأا نم رلاود نويلم5ةمئاقلا ةزاتمملا مهسلأا نم رلاود نييلام . ةبسنب ةبولطملا دئاوعلا ضرتفا8 و ٪12 و ٪10 يلاوتلا ىلع ٪ ةبيرض لدعمو35٪.1.2.3.

13-12WACC and NPVIn our previous example, we calculated the firm’s WACC to be 9.7% ةكرشلل حجرملا طسوتملا لاملا سأر لدعم انبسح ، قباسلا انلاثم يف ةبسنب9.7٪Would NPV be positive or negative if:•We invested in a project offering a 9% return?•We invested in a project offering a 10% return?•We invested in a project offering a 9.7% return?

13-13Measuring Capital StructureWhen estimating WACC, use market values, not book values.ةيرتفدلا ميقلا سيلو قوسلا ميق مدختسا ، لاملا سأر ةفلكتل حجرملا لدعملا ريدقت دنع.Market Value of Debtنويدلل ةيقوسلا ةميقلا•Present Value of all coupons and principal, discounted at the current YTM.• رعسب ةموصخم غلبملا لصأو مئاسقلا عيمجل ةيلاحلا ةميقلاYTM يلاحلا.Market Value of Equityمهسلأل ةيقوسلا ةميقلا•Market price per share multiplied by the number of shares outstanding.•ةمئاقلا مهسلأا ددع يف ابورضم مهس لكل قوسلا رعس.

13-14Measuring Capital Structure: ExampleIf a firm’s bonds pay a 5% coupon and mature in 3 years, what is their market value, assuming a 7% yield to maturity? Assume the bond has a $1,000 p ةميقب ةميسق ةكرشلا تادنس تعفد اذإ5 يف قحتستو ٪3 اهتميق يه امف ، تاونس دئاع ضارتفاب ، ةيقوسلا7 ةيمسا ةميق هل دنسلا نأ ضرتفا ؟قاقحتسلاا خيرات ىتح ٪ اهردق1000رلاود.arvalue.

13-15Calculating Expected ReturnsTo calculate the WACC, we must first calculate the rates of return that investors expect from each security. باسحلWACC ،ةيلام ةقرو لك نم نورمثتسملا اهعقوتي يتلا دئاعلا تلادعم باسح ًلاوأ انيلع بجي.•Expected returns on bonds ىلع ةعقوتملا دئاوعلاتادنسلا•Expected returns on common stock دئاوعلاةيداعلا مهسلأا ىلع ةعقوتملا•Expected returns on preferred stock دئاوعلاةلضفملا مهسلأا ىلع ةعقوتملا

13-16Expected Return on BondsThe risk of bankruptcy aside, the yield to maturityrepresents an investor’s expected return on a firm’s bonds. ىتح دئاعلا نإف ، سلافلإا رطاخم نع رظنلا ضغبورشلا تادنس ىلع رمثتسملل عقوتملا دئاعلا لثمي قاقحتسلااةك.

13-17Expected Return on Common StockEstimating requityusing CAPM:Example: A firm’s beta is 1.5, Treasury bills currently yield 4%, and the long-run market risk premium is 8%. What is the firm’s cost of equity?لاثم : وه ام ةكرشل يبيرجتلا رادصلإا1.5 ، ةبسنب اًيلاح ةنازخلا نوذأ دئاعو4 ةبسنب لجلأا ةليوط قوسلا رطاخم ىلع ةولاع ، ٪8٪ . ةيكلملا قوقح ةفلكت يه ام؟ةكرشلل

13-18Expected Return on Common StockEstimating requityusing the DDM:Example: A firm’s shares are trading for $45 per share. The firm is expected to pay a $2 per share dividend at the end of the year. What is its expected return on equity assuming a 9% constant growth rate?لاثم : لباقم ةكرشلا مهسأ لوادت متي45دحاولا مهسلل اًرلاود . ةكرشلا عفدت نأ عقوتملا نم2 لكل رلاودماعلا ةياهن يف مهس . تباث ومن لدعم ضارتفاب نيمهاسملا قوقح ىلع عقوتملا دئاعلا وه ام9؟٪

13-19Expected Return on Preferred StockA preferred stock that pays a fixed annual dividend is no more than a simple perpetuity.ثكأ سيل ةتباث ةيونس اًحابرأ عفدي يذلا لضفملا مهسلا نإ نم رةطيسب ةيرارمتسا درجم.

13-20Expected Return on Preferred Stock: ExampleIf a share of preferred stock sells for $40 and it pays a dividend of $3 per share, what is the expected return on that share of stock? غلبمب ةزاتمملا مهسلأا نم ةصح عيب مت اذإ40 اهردق اًحابرأ تعفدو اًرلاود3؟مهسلأا نم ةصحلا كلت ىلع عقوتملا دئاعلا وه امف ، مهس لكل تارلاود

13-21WACC PitfallsThe WACC is appropriate only for projects that have the same riskas the firm’s existing business. دعيWACC رطاخم سفن اهل يتلا عيراشملل طقف اًبسانمةكرشلل ةيلاحلا لامعلأا.Upward/Downward Adjustments ىلعلأ تلايدعت /لفسلأAltering Capital Structureلاملا سأر لكيه ليدعت•Two costs of debt finance: Explicit and Implicit•نويدلا ليومت فيلاكت نم نينثا :ينمضو حيرص

13-22Altering Capital Structure: ExampleWhat is the WACC for a firm with $100 million in debt requiring a 6% return and $400 million in equity requiring a 10% return? Assume a tax rate of 35%.What if the firm borrows an additional $150 million to retire some of its shares, but investors now demand 9% on the debt and 12% on equity?

13-23Valuing Entire BusinessesWe can treat entire companies like giant projects and value them using the WACC. مادختساب اهمييقتو ةقلامعلا عيراشملا لثم اهلمكأب تاكرشلا عم لماعتلا اننكميWACC.Free Cash FlowCash flow that is not required for investment in fixed assets or working capital and is thereforeavailable to investors. لماعلا لاملا سأر وأ ةتباثلا لوصلأا يف رامثتسلال بولطملا ريغ يدقنلا قفدتلانيرمثتسملل حاتم وهف يلاتلابو.

13-24Valuing Entire Businesses

13-25Valuing Entire Businesses: ExampleUse the following information to calculate the value of a business that your firm is considering acquiring.تسلاا يف كتكرش ركفت يتلا لامعلأا ةميق باسحل ةيلاتلا تامولعملا مدختسا ذاوحاهيلع.Firm’s WACC: 12.5%Firm’s Cash Flows•$1 million FCF, years 1-4•$1.05 million FCF, year 5 •5% growth after 4 years

13-26Valuing Entire Businesses: Example

14-2Introduction to Corporate FinancingFirms have three sources of cash from which to finance their activities. ليومت اهللاخ نم نكمي ةيدقن رداصم ةثلاث تاكرشلا ىدلاهتطشنأ.This chapter provides an overview of debt, equity, and internally generated funds. ةيكلملا قوقحو نويدلا نع ةماع ةحمل لصفلا اذه مدقياًيلخاد ةدلوتملا لاوملأاو.

14-3Financial MarketsCompetition in financial markets is fierce–much more so than in product markets. ةسرش ةيلاملا قاوسلأا يف ةسفانملا-تاجتنملا قاوسأ يف ةسفانملا نم رثكأ.Few protected niches (ex: cannot patent the structure of a new security) ةيمحملا ذفانملا نم ليلق ددع(لاثملا ليبس ىلع : ةءارب ىلع لوصحلا نكمي لاةديدج ةيلام ةقرو لكيهل عارتخا)Securities sell for their true values عيبةيقيقحلا اهميقل ةيلاملا قارولأا

14-4Corporate FinancingFirms have three broad sources of cash.Internally generated fundsايلخاد ةدلوتملا لاوملأاNew equity issues مهسلأا اياضقةديدجلاNew debt issuesةديدجلا نويدلا اياضق

14-5Internally Generated FundsHistorical sources of funds for FedEx1995-2010

14-6Why Internal Funds?Managers prefer to reinvest internal funds for a number of reasons:بابسلأا نم ددعل ةيلخادلا لاوملأا رامثتسا ةداعإ نوريدملا لضفي:Cost of issuing securitiesةيلاملا قارولأا رادصإ ةفلكتNew equity announcement implicationsةديدجلا مهسلأا نلاعإ راثآ

14-7Corporate FinancingWhat happens when the firm cannot finance all of its activities from plowed-back funds?؟ةثورحملا لاوملأا نم اهتطشنأ عيمج ليومت ةكرشلا عيطتست لا امدنع ثدحي اذامةبترتملا راثلآاFinancial Deficitيلام زجعNew Equity Issuesةديدجلا مهسلأا اياضقNew Debt Issuesةديدجلا نويدلا اياضق

14-8Equity IssuesMost corporations are too large to be owned by one investor; therefore they issue stock to many investors.نيرمثتسملا نم ديدعلل مهسلأا نوردصي كلذل ؛ دحاو رمثتسم اهكلتمي نأ نم ربكأ تاكرشلا مظعم.Example:Dow is owned by 650,000 different investors. If it has 1.167 billion shares outstanding, how much of Dow does an investor who holds one share لبق نم ةكولمم واد650فلتخم رمثتسم فلأ . هيدل ناك اذإ1.167 امف ، مئاق مهس نويلم؟اًدحاو اًمهس كلتمي يذلا رمثتسملا هكلتمي يذلا واد رادقمown?The investor owns:, or 0.000000085%of Dow

14-9Equity TerminologyTreasury stockةنيزخلا مهسأ•Stock that has been repurchased by the company and held in its treasury.اهتنيزخ يف اهب تظفتحاو اهئارش ةكرشلا تداعأ يتلا مهسلأا.Issued shares and Outstanding Sharesةقحتسملا مهسلأاو ةردصملا مهسلأا•Shares that have been issued by the company; shares that have been issued by the company and are held by investors. يتلا مهسلأانورمثتسملا اهكلميو ةكرشلا اهتردصأ يتلا مهسلأا ؛ ةكرشلا اهتردصأ.Authorized Share Capitalهب حرصملا لاملا سأر•The maximum number of shares that the company is permitted to issue without additional shareholder approval. ددعل ىصقلأا دحلايفاضإ مهاسم ةقفاوم نود اهرادصإب ةكرشلل حومسملا مهسلأا.

14-10Equity Terminology: ExampleImagine a firm has 100 million shares currently trading on the NYSE. The firm issues 20 million new shares, and repurchases 5 million shares one month later. ام ةكرش ىدل نأ ليخت100كرويوين ةصروب يف اًيلاح اهلوادت متي مهس نويلم . ةكرشلا تردصأ20 نويلم ءارش تداعأو ، ديدج مهس5دحاو رهش دعب مهس نييلام.What is the total change in treasury stock?؟ةنيزخلا نوزخم يف يلكلا ريغتلا وه امWhat is the total change in the number of issued shares?؟ةردصملا مهسلأا ددع يف يلكلا ريغتلا وه امWhat is the total change the number of shares outstanding?؟ةمئاقلا مهسلأا ددعل يلامجلإا رييغتلا وه ام

14-11Equity TerminologyWhen a firm issues new equity, it records each new share in its books at par value. اهرتافد يف ديدج مهس لك لجست اهنإف ، ةديدج ةيكلم قوقح ام ةكرش ردصت امدنعةيمسلاا ةميقلاب.Additional Paid-in Capitalعوفدملا لاملا سأر يفاضإ•The difference between the issue price and the par value of a stockمهسلل ةيمسلاا ةميقلاو رادصلإا رعس نيب قرفلاRetained Earningsةزجتحملا حابرلأا•Earnings not paid out as dividendsحابرأك حابرلأا عفد متي مل

14-12Equity Terminology: ExampleSuppose a firm has recently issued 10 million new shares at $15 per share; the par value of each is $1.50. اًرخؤم تردصأ تاكرشلا ىدحإ نأ ضرتفنل10 رعسب ديدج مهس نييلام15 ؛ دحاولا مهسلل اًرلاود اهنم لكل ةيمسلاا ةميقلا1.50رلاود.What is the value of additional paid-in capital (APIC)?

14-13Net Common EquityNet CommonEquity=ParValue+AdditionalPaid-in Capital+RetainedEarnings-ShareRepurchasesRepresents the total amount contributed directly by shareholders when the firm issued new stock, and contributed indirectly when it plowed back part of its earnings لكشب تمهاسو ، ةديدج اًمهسأ ةكرشلا تردصأ امدنع رشابم لكشب نومهاسملا هب مهاس يذلا يلامجلإا غلبملا لثمياهحابرأ نم اًءزج تدرتسا امدنع رشابم ريغ

14-14Net Common Equity: ExampleWhat is the book value per share of equity for a firm with $1 million in net common equity; 50,000 in authorized share capital; 25,000 shares issued; and 20,000 shares outstanding? اهتميق غلبت ةكرشل ةيكلملا قوقح نم دحاولا مهسلل ةيرتفدلا ةميقلا يه ام1 يفاص يف رلاود نويلم ؛ ةيداعلا ةيكلملا قوقح50000 رادصإ مت ؛ هب حرصملا لاملا سأر يف25000 و ؛ مهس20000؟ةقلعم مهس

14-15Corporate OwnershipA corporation is owned by its common stockholders.نييداعلا نيمهاسملا لبق نم ةكولمم ةكرشلا.Owners are entitled to:نيكلاملل قحي:ProfitsحابرأControl of the firmةكرشلا ىلع ةرطيسلا

14-16Corporate OwnershipShareholders exercise control over the firm by voting for its board of directors.اهترادإ سلجمل تيوصتلا للاخ نم ةكرشلا ىلع ةرطيسلا نومهاسملا سرامي.•Majority Votingةيبلغلأا تيوصت•Voting system in which each director is voted on separately•ةدح ىلع ريدم لك ىلع تيوصتلا هيف متي يذلا تيوصتلا ماظن•Cumulative Votingيمكارتلا تيوصتلا•Voting system in which all votes that one shareholder is allowed to cast can be cast for one candidate for the board of directors• دحلأ حمسُي يتلا تاوصلأا عيمجب ءلادلإا هللاخ نم نكمي يذلا تيوصتلا ماظنةرادلإا سلجمل دحاو حشرمل اهب ءلادلإاب نيمهاسملا•Proxy Contestدعب نع ةسفانم•Takeover attempt in which outsiders compete with management for shareholders’ votes اهيف سفانتي ذاوحتسا ةلواحمنيمهاسملا تاوصأ ىلع ةرادلإا عم ءابرغلا

14-17Corporate Ownership: ExampleA shareholder owning 100 shares of stock is voting for the board of directors who are elected by cumulative voting. How many votes did the shareholder cast for Director ‘A’ if four directors are to be elected and the shareholder cast his/her maximum number of votes for ‘A’? كلتمي يذلا مهاسملا توصي100 تيوصتلاب هباختنا متي يذلا ةرادلإا سلجمل مهسلأا نم مهسيمكارتلا . ريدملل مهاسملا اهب ىلدأ يتلا تاوصلأا ددع مك”أ ” نيريدم ةعبرأ باختنا متيس ناك اذإ حلاصل تاوصلأا نم ددع ىصقأب مهاسملا ىلدأو”أ”؟400

14-18Preferred StockPreferred Stock Advantages: مهسلأا ايازمةلضفملا:•Dividendsحابرأ•Tax Advantagesةيبيرضلا ايازملاPotential Disadvantages:ةلمتحملا بويعلا:•Interest rate fluctuationsةدئافلا راعسأ تابلقت•Floating Rate Preferredمئاعلا رعسلا لضفي

14-19Corporate DebtWhen issuing debt, companies promise to make payments and repay principal. But they have limited liability; debt is not always repaid. دادسو تاعوفدملا دادسب تاكرشلا دهعتت ، نويدلا رادصإ دنعنيدلا لصأ .ةدودحم ةيلوؤسم مهيدل نكل . نويدلا دادس متي لااًمئاد.

14-20Debt CharacteristicsInterest rate fluctuationsةدئافلا راعسأ تابلقتCoupon vs. Zero-coupon Bonds تادنس لباقم ةميسقةيرفصلا ةميسقلاPrime Rateهدئافل ا لدعمLIBORWould you expect the price of a 10-year floating-rate bond to be more or less sensitive to changes in interest rates than the price of a 10-year fixed-rate bond? ةدمل مئاعلا رعسلا تاذ تادنسلا رعس نوكي نأ عقوتت له10 ةيساسح لقأ وأ رثكأ تاونس ةدمل تباثلا ةدئافلا لدعم تاذ تادنسلا رعس نم ةدئافلا راعسأ يف تاريغتلل10؟تاونس

14-21Debt CharacteristicsFunded and Unfunded Debtةلومملا ريغو ةلومملا نويدلا•Debt with more than 1 year remaining to maturity; debt due in less than one year. ؛ قاقحتسلاا خيرات ىتح ةدحاو ةنس نم رثكلأ يقبتملا نيدلاةدحاو ةنس نم لقأ يف ةقحتسملا نويدلا.Sinking Fundقودنص قرغ•A fund established to retire debt before maturity.•اهقاقحتسا خيرات لبق نويدلا دادسل سسأت قودنص.Callable Bondءاعدتسلال لباق دنوب•A bond that may be repurchased by a firm before maturity at a specified call price.•ددحم ءاعدتسا رعسب قاقحتسلاا لبق هئارش ةكرشلا ديعت دق دنس.If interest rates rise, would holders of callable bonds expect the firm to buy back the debt?يدلا ءارش ةداعإب ةكرشلا موقت نأ دادرتسلال ةلباقلا تادنسلا ولماح عقوتي لهف ، ةدئافلا راعسأ تعفترا اذإ؟نو

14-22Debt CharacteristicsSeniorityةيمدقلأاSubordinated Debtةيوناثلا نويدلاSecurityةيامحSecured Debtةنومضملا نويدلاCurrency and Country of Originأشنملا دلبو ةلمعلاEurodollarsرلاود ورويلاEurobond دنوبوروي

14-23Debt CharacteristicsPublic vs. Private Placementsةصاخلا عضاوملا لباقم يف ةماعلا عضاوملاProtective Covenantsةيئاقولا قيثاوملا•Restrictions on a firm to protect bondholders•تادنسلا ةلمح ةيامحل ةكرش ىلع دويقLeasesتاراجيلإا•Long-term rental agreementsلجلأا ةليوط راجيلإا دوقع

14-24Convertible SecuritiesGive investorsthe option to alter their investments if they so choose.كلذ اوراتخا اذإ مهتارامثتسا رييغت رايخ نيرمثتسملا حنما.Warrantةركذم•The right to buy shares from a company at a stipulated price before a set date رعسب ةكرش نم مهسأ ءارش يف قحلاددحم خيرات لبق ددحمConvertible Bondليوحتلل ةلباقلا تادنسلا•A bond that the holder may exchange for a specified amount of another security هلادبتسا هلماحل زوجي يذلا دنسلاىرخأ ةيلام ةقرو نم ددحم غلبمب

14-25Convertible Securities: ExampleAn investor owns a bond selling for $1,000. This bond can be converted to 20 shares of stock that are currently selling for $55 per share. Should the investor convert his bond into shares? غلبمب عيب دنس رمثتسملا كلتمي1000رلاود . ىلإ دنسلا اذه ليوحت نكمي20 يتلا مهسلأا نم اًمهس لباقم اًيلاح اهعيب متي55دحاولا مهسلل اًرلاود .؟مهسأ ىلإ هدنس ليوحت رمثتسملا ىلع بجي لهWithout conversion:With conversion:

15-2How Corporations Raise Venture Capital and Issue SecuritiesYoung firms often require venture capital to finance growth.نلا ليومتل يرامثتسا لام سأر ةباشلا تاكرشلا بلطتت ام اًبلاغوم.The issuance of securities is a complex process that the successful financier must comprehend. حجانلا لومملا ىلع بجي ةدقعم ةيلمع ةيلاملا قارولأا رادصإ دعياهمهف.

15-3Company GrowthVenture Capital provides entrepreneurs with financing to grow their firms. رفويVenture Capital ةيمنتل عيراشملا باحصلأ ليومتلامهتاكرش.Firms issue securities to further finance their growth.اهومن ليومت ةدايزل ةيلام قاروأ تاكرشلا ردصت.

15-4Obtaining Venture CapitalSteps to obtaining venture funding: تاوطخعورشملا ليومت ىلع لوصحلا:1.Prepare a business plan.لمع ةطخ دادعإب مق.2.Receive first-stagefinancing. ليومت ىلع لوصحلاىلولأا ةلحرملا.3.Receive subsequent stagedfinancing. ىلع لصحاقحلا يلحرم ليومت.

15-5Venture Capital Ownership: ExampleSuppose a Venture Capital firm offers to purchase 1 million of your firm’s shares for $1 each, which will give them 50% ownership in the firm. What value are they placing on your firm? لباقم كتكرش مهسأ نم نويلم ءارش ضرعت يرامثتسلاا لاملا سأر تاكرش ىدحإ نأ ضرتفنل ةبسنب ةيكلم اهحنمي امم ، اهنم لكل دحاو رلاود50ةكرشلا يف ٪ . ىلع اهنوعضي يتلا ةميقلا يه ام؟كتكرش

15-6Types of Venture InvestorsAngel Investorsكلام نورمثتسم•Investors who finance companies in their earliest stages of growth•ىلولأا اهومن لحارم يف تاكرشلا نولومي نيذلا نورمثتسملاCorporate Venturersتاكرشلا نيرمثتسملا•Corporations that offer venture assistance to finance young, promising companies.•ةباشلا ةدعاولا تاكرشلا ليومتل عيراشملا يف ةدعاسملا مدقت يتلا تاكرشلا.Private Equity Investingةصاخلا مهسلأا يف رامثتسلاا•Investors who offer funds to finance firms that do not trade on public stock exchanges such as the NYSE or NASDAQ.• لثم ةماعلا تاصروبلا يف لوادتت لا يتلا تاكرشلا ليومتل لاوملأا نومدقي نيذلا نورمثتسملاNYSE وأNASDAQ.

15-7Venture Capital ManagementVenture Capitalist are not passive investors.Venture Capitalist نييبلس نيرمثتسم اوسيل.What do they provide beyond financing?؟ليومتلا دعب نومدقي اذام

15-8The Initial Public OfferingWhen a firm requires more capital than private investors can provide, it can choose to go public through an Initial Public Offering, or IPO. رايتخا اهنكمي ، صاخلا عاطقلا ورمثتسم همدقي نأ نكمي امم ربكأ لام سأر ةكرشلا بلطتت امدنعماعلا باتتكلاا وأ يلولأا ماعلا باتتكلاا للاخ نم ماعلا باتتكلال اهحرط.Primary Offeringيلولأا حرطلا–when new shares are sold to raise additional cash for the company–ةكرشلل ةيفاضإ لاومأ عمجل ةديدج مهسأ عيب دنعSecondary Offeringيوناثلا حرطلا–when the company’s founders and venture capitalists cash in on some of their gains by selling shares.– قيرط نع مهبساكم ضعب نم لاوملأا سوؤر باحصأو ةكرشلا وسسؤم ديفتسي امدنعمهسلأا عيب.Does a secondary offering provide additional capital to the firm?؟ةكرشلل يفاضإ لام سأر يوناثلا حرطلا رفوي له

15-9Benefits of Going PublicAbility to raise new capitalديدجلا لاملا سأر ةدايز ىلع ةردقلاStock price provides performance measure مهسلا رعس رفويءادلأا سايقمInformation more widely available ىلع ةحاتملا تامولعملاعسوأ قاطن

15-10Benefits of Going PublicDiversified sources of financeليومتلل ةعونتم رداصمReduced borrowing costsضارتقلاا فيلاكت ضافخنا

15-11Arranging Public IssuesSteps to issue a new public security:ديدج ماع نمأ ماظن رادصإ تاوطخ:1.SEC Registration ليجستSEC•Prospectus—a formal summary that provides information on an issue of securities رادصلإا ةرشن- لوح تامولعم رفوي يمسر صخلمةيلاملا قارولأا رادصإ2.Select Underwriter / Undertake Roadshow باتتكلاا دهعتم ددح / ذيفنتةيجيورت ةلمح3.Set final issue price for publicروهمجلل يئاهنلا رادصلإا رعس ديدحت

15-12IPO FlowchartInvestorsFirmUnderwriter124351.Underwriter provides advice to firm2.Underwriter pays firm for a number of shares3.Firm provides shares to underwriter to be resold4.Underwriter offers shares to investors5.Investors purchase shares from underwriter6.ةكرشلل ةروشملا بتتكملا مدقي7.مهسلأا نم ددع لباقم ةكرشل نيمأتلا دهعتم عفدي8.اهعيب ةداعلإ بتتكملل مهسلأا ةكرشلا مدقت9.نيرمثتسملل مهسلأا بتتكملا مدقي10.بتتكملا نم مهسلأا ءارشب نورمثتسملا موقي

15-13Underwriter SpreadAssume the issuing company incurs $1 million in expenses to sell 3 million shares at $40 each to an underwriter; the underwriter sells the shares at $43 each. What is the spread for this deal? عيبل تافورصمك رلاود نويلم دبكتت ةردصملا ةكرشلا نأ ضرتفا3 رعسب مهس نييلام40 اًرلاود رعسب مهسلأا بتتكملا عيبي ؛ نماض لكل43مهس لكل اًرلاود .؟ةقفصلا هذهل ديربسلا وه امSpread-the difference between the public offer price and the price paid by underwriterSpread – هعفدي يذلا رعسلاو ماعلا ضرعلا رعس نيب قرفلابتتكملا

15-14Underwriting ArrangementsFirm Commitment:خسارلا مازتللاا:Underwriters buy the securities from the firm and then resell them to the public.روهمجلل اهعيب نوديعي مث ةكرشلا نم ةيلاملا قارولأا باتتكلاا ودهعتم يرتشي.Best Efforts Commitment:دوهجلا لضفأب مازتللاا:Underwriters agree to sell as much of the issue as possible but do not guarantee the sale of the entire issue.هلمكأب رادصلإا عيب نونمضي لا مهنكلو رادصلإا نم نكمم ردق ربكأ عيب ىلع نودهعتملا قفاوي.

15-15Underwriting Arrangements: Capital To FirmHow much will a firm receive in net funding from a firm commitment underwriting of 250,000 shares priced to the public at $40 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees. غلبي دكؤم باتتكا دهعت نم ليومتلا يفاص يف ةكرشلا هيلع لصحتس يذلا غلبملا وه ام250.000 رعسب مهس40 اًرلاود ةبسنب باتتكا شماه ةفاضإ تمت اذإ اًيكيرمأ10 ةكرشلا عفدت ، كلذ ىلإ ةفاضلإاب ؟بتتكملا هعفدي يذلا رعسلا ىلإ ٪600000ةينوناق موسرك رلاود.

15-16Underpricing of an IPOExample: Assume the issuer incurs $1 million in other expenses to sell 3 million shares at $40 each to an underwriter and the underwriter sells the shares at $43 each. By the end of the first day’s trading, the issuing company’s stock price had risen to $70. What is the total cost of underpricing?لاثم : عيبل ىرخأ تافورصمك رلاود نويلم دبكتي ردصُملا نأ ضرتفا3 رعسب مهس نييلام40 ، نماض ىلإ مهس لكل اًرلاود رعسب مهسلأا نماضلا عيبيو43مهس لكل اًرلاود . ىلإ ةردصملا ةكرشلا مهس رعس عفترا ، لولأا مويلا لوادت ةياهن لولحب70اًرلاود .؟ريعستلل ةيلامجلإا ةفلكتلا يه امCost of Underpricing:Underpricing: Issuing securities at an offering price set below the true value of the security.ىندلأا ريعستلا :ةيلاملا قارولأل ةيقيقحلا ةميقلا نم لقأ ددحم حرط رعسب ةيلاملا قارولأا رادصإ.

15-17Flotation CostsFlotation Costs: The costs incurred when a firm issues new securities to the public.ميوعتلا فيلاكت :شلا موقت امدنع اهدبكت متي يتلا فيلاكتلا ةكرروهمجلل ةديدج ةيلام قاروأ رادصإب.What are some of the specific costs incurred when a firm issues new securities?قاروأ رادصإب ةكرشلا موقت امدنع اهدبكت متي يتلا ةددحملا فيلاكتلا ضعب يه ام؟ةديدج ةيلام

15-18Types of OfferingsAfter the IPO, successful firms may issue additional equity or debt.ةيفاضإ اًنويد وأ اًمهسأ ةحجانلا تاكرشلا ردصت دق ، ماعلا باتتكلاا دعب.Seasoned Offeringكنحم ضرعRights Issueقوقحلا رادصإIssue of securities offered only to current stockholders.نييلاحلا نيمهاسملل طقف ةمدقملا ةيلاملا قارولأا رادصإ.General Cash Offerماعلا يدقنلا ضرعلاSale of securities open to all investors by an already-public company.لعفلاب ةماع ةكرش لبق نم نيرمثتسملا عيمجل حوتفم ةيلاملا قارولأا عيب.

15-19Rights Issue: ExampleAn investor exercises his right to buy one additional share at $20 for every five shares held. How much should each share be worth after the rights issue if they previously sold for $50 each? رعسب دحاو يفاضإ مهس ءارش يف هقح رمثتسملا سرامي20ةكولمم مهسأ ةسمخ لكل اًرلاود . مك غلبمب اًقبسم هعيب مت اذإ قوقحلا رادصإ دعب مهس لك قحتسي نأ بجي50مهس لكل اًرلاودPre-Rights Issue:Post-Rights Issue:+

15-20General Cash Offer and Shelf RegistrationBenefits of Shelf Registration:فرلا ليجست دئاوف:1.Security issuance without excessive costs2.Security issuance on very short notice3.Timed issuance to capitalize on favorable market conditions4.Additional underwriter competition5.ةظهاب فيلاكت نودب ةيلاملا قارولأا رادصإ6.ادج ريصق تقو يف نامضلا رادصإ7.ةيتاوملا قوسلا فورظ نم ةدافتسلال بسانملا تقولا يف رادصلإا8.ةيفاضإ بتتكم ةسفانمShelf Registration: A procedure that allows firms to file one registration statement for several issues of the same security.فرلا ىلع ليجستلا : دحاو ليجست نايب ميدقتب تاكرشلل حمسي ءارجإناملأا سفن نم تارادصإ ةدعل.

15-21Private PlacementsIn order to avoid registering with the SEC, a company can issue a security privately. ةيلام ةقرو رادصإ ةكرشلل نكمي ، تاصروبلاو ةيلاملا قارولأا ةئيه يف ليجستلا بنجت لجأ نمصاخ لكشب.Private Placement:The sale of securities to a limited number of investors without a public offeringصاخلا حرطلا : نود نيرمثتسملا نم دودحم ددعل ةيلاملا قارولأا عيبماع حرط

15-22Private Placements-AdvantagesDo not have to register with SEC يف ليجستلل يعاد لاSECPrivate placements cost lessthan public issuesةماعلا تارادصلإا نم لقأ فلكت ةصاخلا عضاوملاContracts can be customized for each investorرمثتسم لكل دوقعلا صيصخت نكمي

15-23Private Placements-DisadvantagesDifficult for investors to resell securityةيلاملا قارولأا عيب ةداعإ نيرمثتسملا ىلع بعصيLenders often require higher return to compensate for higher risk.•Private placements typically yield .5% higher than public issues•ىلعلأا رطاخملا نع ضيوعتلل ىلعأ اًدئاع نوضرقملا بلطي ام اًبلاغ.• ةبسنب ةدايز ىلإ ًةداع ةصاخلا عضاوملا يدؤت0.5 تارادصلإا نع ٪ةماعلا

Debt policiesDebt policies should also address debt structure and general repayment terms, including maximum repayment terms, debt service patterns (such as equal payments or equal principal amortization), and the use of variable or fixed-rate interest.16-2 نيدلا تاسايس لوانتت نأ بجيدادسلا طورشو نيدلا لكيه اًضيأ طورش كلذ يف امب ، ةماعلا ةمدخ طامنأو ، ىوصقلا دادسلا نيدلا(ةيواستملا تاعوفدملا لثميواستملا نيدلا لصأ ءافطإ وأ ) ، وأ ريغتم ةدئاف لدعم مادختساوتباث.

Example–Debt is anything owed by one party to another. Examples of debt includeamounts owed on credit cards, car loans, and mortgages.رخآ فرطل فرط هب نيدي ام لك وه نيدلا . ةلثمأ لمشت ضورقو نامتئلاا تاقاطب ىلع ةقحتسملا غلابملا نويدلاةيراقعلا نوهرلاو تارايسلا.16-3

Types of DebtGenerally, there are two main types of debt:secured and unsecured. Within those types, you’ll see revolving and installment debt. Aside from the fact that you owe money, these types of debt are different. For instance, your mortgage is an example of secured debt, while an example of unsecured debt is your credit card.نويدلا نم نايسيئر ناعون كانه ، ماع لكشب :نومضملا ريغو نومضملا . ، عاونلأا هذه نمضطاسقلأاو ةددجتملا نويدلا ىرتس . نم عاونلأا هذه نإف ، لاملاب نيدم كنأ ةقيقح نع رظنلا فرصبةفلتخم نويدلا . يف ، ةنومضملا نويدلا ىلع لاثم وه كب صاخلا يراقعلا نهرلا ، لاثملا ليبس ىلعةنومضملا ريغ نويدلا ىلع لاثم يه كب ةصاخلا نامتئلاا ةقاطب نأ نيح.16-4

Debt Management–There are various debt management strategies followed by creditors. For example:banks are smart enough to sanction only that amount of loan to a person which he can easily repay in form of the EMIs. This is one of the form of public debt management strategies followed by banks.نونئادلا اهعبتي يتلا نويدلا ةرادإ تايجيتارتسا نم ديدعلا كانه .لاثملا ليبس ىلع :ذ كونبلا ةيك لكش يف ةلوهسب هدادس هنكمي يذلا صخشلا ىلإ ضرقلا نم طقف غلبملا اذه ةبقاعمل يفكي امب ضورقEMIs. كونبلا اهعبتت يتلا ماعلا نيدلا ةرادإ تايجيتارتسا لاكشأ دحأ وه اذه.16-5

16-6Debt PolicyChanging a firm’s capital structure should not affect its value to shareholders.نيمهاسملل اهتميق ىلع ةكرشلا لام سأر لكيه رييغت رثؤي لاأ بجي.This chapter analyzes several possible financing scenarios and provides an overview of the effects of taxes and costs of financial distress on a firm. ةحمل مدقيو ةلمتحملا ليومتلا تاهويرانيس نم ديدعلا لصفلا اذه للحيةكرشلا ىلع ةيلاملا ةقئاضلا فيلاكتو بئارضلا راثآ نع ةماع.

16-7Does Borrowing Affect Value?A company’s choice of capital structuredoes not increase the value of the firm.ةكرشلا ةميق نم ديزي لا لاملا سأر لكيهل ةكرشلا رايتخا.

16-8MM’s Irrelevance PropositionThe value of a firm does notdepend on its capital structure.اهلام سأر لكيه ىلع ةكرشلا ةميق دمتعت لا.If this holds, can financial managers increase the value of the firm by changing the mix of securities used to finance the company? ةكرشلا ةميق ةدايز نييلاملا نيريدملل نكمي لهف ، اًحيحص اذه ناك اذإ؟ةكرشلا ليومت يف ةمدختسملا ةيلاملا قارولأا جيزم رييغت قيرط نع

16-9MM’s Irrelevance PropositionAssumptions of MM’s argument:“Well functioning” capital markets ةجح تاضارتفاMM: لاملا سأر قاوسأ” لكشب لمعتديج“Efficient capital markets لام سأر قاوسأ ةلاعفNo taxes (therefore no distortion) بئارض لا(فيرحت لا كلذل)Ignore costs of financial distressةيلاملا ةقئاضلا فيلاكت لهاجت

16-10MM’s Irrelevance PropositionExample: An all-equity financed firm has 1 million shares outstanding, currently selling at $10 per share. It considers a restructuringthat would issue $4 million in debt to repurchase 400,000 shares. How does this affect overall firm value?لاثم : رعسب اًيلاح عابتو ، مئاق مهس نويلم اهيدل مهسلأا نم لماكلاب ةلومم ةكرش10دحاولا مهسلل تارلاود . ةلكيه ةداعإ سردت يهو ةميقب نويد رادصإ اهنأش نم4 ءارش ةداعلإ رلاود نييلام400مهس فلأ .ةكرشلل ةيلامجلإا ةميقلا ىلع اذه رثؤي فيك؟Before Restructuring:After Restructuring:

16-11How Borrowing Affects EPSCeteris paribus, borrowing will increase earnings per share. However, this isn’t a source of value to shareholders.حبر نم ديزيس ضارتقلاا نإف ، تاريغتملا ىقاب تابث ضارتفا عممهسلا ةي .نيمهاسملل ةميق اذ اًردصم سيل اذه ، كلذ عمو.Shareholders can easily replicate a firm’s borrowing on their own if they choose.ةكرشلا لمع راركت ةلوهسب نيمهاسملل نكميكلذ اوراتخا اذإ مهسفنأ ءاقلت نم ضارتقلاا.

16-12How Borrowing Affects Risk and ReturnDebt financing does not affect the operating riskof the firm. ليغشتلا رطاخم ىلع نويدلا ليومت رثؤي لاةكرشللDebt financing does affect the financial riskof the firm.ةكرشلل ةيلاملا رطاخملا ىلع نويدلا ليومت رثؤي.

16-13How Borrowing Affects Risk and Return

16-14Debt and the Cost of Equity

16-15Debt and the Cost of Equity: ExampleWhat is the expected return on equity for a firm with a 14% expected return on assets that pays 9% on its debt, which totals 30% of assets? عقوتم دئاع تاذ ةكرشل ةيكلملا قوقح ىلع عقوتملا دئاعلا وه ام14 ددست يتلا لوصلأا ىلع ٪9 يأ ، اهنويد ىلع ٪30؟لوصلأا نم ٪

16-16MM’s Proposition IIDebt increases financial risk and causes shareholders to demand higher rates of return. نيمهاسملا ةبلاطم ىلإ يدؤيو ةيلاملا رطاخملا نم نيدلا ديزيىلعأ دئاع تلادعمب.

16-17Debt and TaxesDebt financing advantage: the interest that a firm pays on debt is tax deductible.نويدلا ليومت ةزيم : نم ةافعم نويدلا ىلع ةكرشلا اهعفدت يتلا ةدئافلابئارضلا.Interest tax shield:

16-18Perpetual Tax ShieldIf the tax shield is perpetual, then:

16-19Perpetual Tax Shield: ExampleWhat is the present value of the tax shields for a firm that anticipates a perpetual debt level of $12 million at an interest rate of 4% and a tax rate of 35%? هردق مئاد نيد ىوتسم عقوتت ةكرشل ةيبيرضلا عوردلل ةيلاحلا ةميقلا يه ام12 ةدئاف لدعمب رلاود نويلم4 بئارض لدعمو ٪35؟٪

When accounting for taxes, borrowing increases firm value and shareholders’ wealth. ةورثو ةكرشلا ةميق نم ضارتقلاا ديزي ، بئارضلا باستحا دنعنيمهاسملا.16-20Tax Shield and Shareholders’ Equity

16-21Taxes and WACCRecall that the WACC takes into account the required after-taxrate of return نأ ركذتWACC ةبيرضلا دعب بولطملا دئاعلا لدعم رابتعلاا يف ذخأي

16-22Taxes and WACC: ExampleWhat is the expected rate of return to shareholders if the firm has a 35% tax rate, a 10% rate of interest paid on debt, a 15% WACC, and a 60% debt-asset ratio? ةبسنب بئارض لدعم ةكرشلا ىدل ناك اذإ نيمهاسملل عقوتملا دئاعلا لدعم وه ام35 ةدئاف لدعمو ، ٪10 متي ٪ ةبسنو ، نيدلا ىلع هعفد15 و ، لاملا سأر ةفلكتل ٪60؟لوصأ ىلإ نيد ةبسن ٪

16-23Costs of Financial DistressInvestors factor the potential for future distress into their assessment of current value.ييقت يف ةيلبقتسم ةقئاض ثودح لامتحا رابتعلاا يف نورمثتسملا ذخأي مهمةيلاحلا ةميقلل.Overall Market Value=Value if all equity financed+PV tax shield–PV costs of financial distress

16-24Bankruptcy CostsIf there is a possibility of bankruptcy, the current market value of the firm is reduced by the present value of all court expenses.قلاب ةكرشلل ةيلاحلا ةيقوسلا ةميقلا ضيفخت متي ، سلافلإل لامتحا كانه ناك اذإ ةميةمكحملا فيراصم عيمجل ةيلاحلا.

16-25Financial Distress Without BankruptcyEven if a firm narrowly escapes bankruptcy, this does not mean that costs of financial distress are avoided.ةيلاملا ةقئاضلا فيلاكت بنجت ينعي لا اذه نإف ، سلافلإا نم ةبوعصب ةكرشلا تجن ول ىتح.Stockholders may be tempted to play games at the expense of creditorsنينئادلا باسح ىلع باعللأا ةسرامم ىلإ نومهاسملا ليمي دقBetting the Bank’s Moneyكنبلا لاومأ ىلع ةنهارملاNot Betting Your Own Moneyةصاخلا كلاومأ ىلع نهارت لاLoan Covenant: Agreement between a firm and lender requiring the firm to fulfill certain conditions to safeguard the loan.ضرقلا ةيقافتا :ضرقلا ةيامحل ةنيعم طورش ءافيتسا ةكرشلا نم بلطتي ضرقملاو ةكرشلا نيب قافتا.

16-26Explaining Financing ChoicesThe Trade-off Theory ةضياقملا ةيرظن•Debt levels are chosen to balance interest tax shields against the costs of financial distress.ةيلاملا ةقئاضلا فيلاكت لباقم ةدئافلا ةبيرض عورد ةنزاومل نيدلا تايوتسم رايتخا متي.A Pecking Order Theory:ريرمتلا بيترت ةيرظن:•Firms prefer to issue debt rather than equity if internal finance is insufficient.• فاك ريغ يلخادلا ليومتلا ناك اذإ ةيكلملا قوقح نم ًلادب نويدلا رادصإ تاكرشلا لضفت.

16-27Financial SlackFinancial managers usually place a very high value on having financial slack.يلاملا يخارتلل اًدج ةيلاع ةميق نويلاملا نوريدملا عضي ام ًةداع.Financial Slack: Ready access to cash or debt financing.يلاملا دوكرلا :نويدلاب وأ يدقنلا ليومتلا ىلإ لوصولا ةلوهس.

16-28Two Faces of Financial SlackBenefitsدئاوف•Long run value rests more on capital investment and operating decisions than on financing.•Most valuable to firms with positive-NPV growth opportunitiesليومتلا نم رثكأ ليغشتلا تارارقو يلامسأرلا رامثتسلاا ىلع ليوطلا ىدملا ىلع ةميقلا دمتعت.ةيباجيلإا ةيلاحلا ةميقلا يفاص ومن صرف اهيدل يتلا تاكرشلل ةميق رثكلأاDrawbacksبويع•Too much financial slack may lead to lazy management.•Managers may try to increase their own perks or engage in empire-building.•ةلوسك ةرادإ ىلإ طرفملا يلاملا دوكرلا يدؤي دق.•ةيروطاربمإ ءانب يف طارخنلاا وأ مهب ةصاخلا تازايتملاا ةدايز نوريدملا لواحي دق.

17-2Payout PolicyFirms can pay cash to shareholders in two major ways; cash dividends and share repurchases.ت ؛ نيتيسيئر نيتقيرطب نيمهاسملل اًدقن عفدلا تاكرشلل نكمي تاعيزوءارش ةداعإ مهسأو ةيدقن حابرأ.This chapter analyzes both options and provides the student with insight into a firm’s payout policy decisions. تارارقل ةبقاث ةرظنب بلاطلا دوزيو نيرايخلا لاك لصفلا اذه للحيةكرشلا دئاوع ةسايس.

17-3How Corporations Pay Cash to ShareholdersCorporations can pay shareholders by paying a dividendor by repurchasing shares. نع وأ مهسلأا حابرأ عفد قيرط نع نيمهاسملل عفدت نأ تاكرشلل نكميمهسلأا ءارش ةداعإ قيرط.Dividends and stock repurchases,United States 1980-2008

17-4Paying DividendsCash Dividend-Payment of cash by the firm to its shareholders ةيدقنلا حابرلأا تاعيزوت- لبق نم يدقنلا عفدلاةكرشلااهيمهاسملRegular Dividendمظتنم دئاعSpecial Dividendةصاخ حابرأ تاعيزوتStock Dividend/Split مهسلأا حابرأ عيزوت /ميسقتDistributions of additional shares to a firm’s stockholdersةكرشلا يمهاسمل ةيفاضلإا مهسلأا تاعيزوت

17-5Stock Dividends: ExampleImagine a corporation currently has 10 million shares outstanding selling at $60 per share and declares a three-for-two stock split. اًيلاح اهيدل ام ةكرش نأ ليخت10 رعسب تعيب مهس نييلام60نينثا ىلإ ةثلاثب مهسلأا ميسقت نلعتو دحاولا مهسلل اًرلاود.After the split, how many shares will be outstanding?After the split, what will be the new share price?

17-6Dividend Policy: Key DatesUnion Pacific Quarterly Dividend Key Datesكيفيساب نوينوي نم ةيلصفلا حابرلأا تاعيزوتل ةيسيئرلا خيراوتلاWhat would you expect to happen to the price of a share of stock on the day it goes ex-dividend? حابرلأا عيزوت هيف متي يذلا مويلا يف مهسلا رعسل ثدحي نأ عقوتت اذام؟The price should decreaseby the amount of the dividend.

17-7Dividends: ExampleImagine a firm has 100,000 shares outstanding, worth $1 million in total. If the firm issues a $1-per-share cash dividend, how is shareholder wealth affected? ةكرش ىدل نأ ليخت100000رلاود نويلم غلبت ةيلامجإ ةميقب ةمئاق مهس . اهردق ةيدقن اًحابرأ ةكرشلا تردصأ اذإ1 ، مهس لكل رلاود؟نيمهاسملا ةورث رثأتت فيكفBefore Dividend:After Dividend:After the cash dividend, the market value of the firm falls to $900,000 and shareholders gain $100,000in cash. ىلإ ةكرشلل ةيقوسلا ةميقلا ضفخنت ، ةيدقنلا حابرلأا عيزوت دعب900000 نومهاسملا بسكيو رلاود100000اًدقن رلاود.

17-8Stock RepurchasesFour ways to implement:ذيفنتلل قرط عبرأ:1.Open-market repurchaseةحوتفملا قوسلا يف ءارشلا ةداعإ2.Tender offerءارش ضرع3.Auctionينلع دازم4.Direct negotiationرشابملا ضوافتلاStock Repurchase–When a firm buys back stock from its shareholders. مهسلأا ءارش ةداعإ-اهيمهاسم نم مهسلأا ءارش ةداعإب ةكرشلا موقت امدنع.

17-9Stock Repurchase: ExampleImagine a firm has 100,000 shares outstanding, worth $1 million in total. If the firm buys back 10,000 shares at $10 each, how is shareholder wealth affected? ةكرش ىدل نأ ليخت100000رلاود نويلم غلبت ةيلامجإ ةميقب ةمئاق مهس . ءارش ةداعإب ةكرشلا تماق اذإ10،000 رعسب مهس10 لكل تارلاود؟نيمهاسملا ةورث رثأتت فيكف ، مهسBefore Dividend:After Repurchase:After the cash dividend, the market value of the firm falls to $900,000 yet shareholders retain equal ownership in the firm. ىلإ ةكرشلل ةيقوسلا ةميقلا ضفخنت ، ةيدقنلا حابرلأا عيزوت دعب900 ةيكلمب نومهاسملا ظفتحي كلذ عمو ، رلاود فلأةكرشلا يف ةيواستم.

17-10Stock Repurchase: ExampleAfter the repurchase, shareholders can sell 10% of their shares and earn $100,000 in cash, yet still retain ownership equal to that which they had before. عيب نيمهاسملل نكمي ، ءارشلا ةداعإ دعب10 بسكو مهمهسأ نم ٪100000 ةيكلمب ظافتحلاا عم ، اًدقن رلاودلبق نم مهيدل تناك يتلا كلتل ةيواسم.The shareholders’ position is exactly the same with the share repurchase as with the cash dividend: •Total shares worth $900,000•Cash worth $100,000• وه امك مهسلأا ءارش ةداعإ عم اًمامت هسفن وه نيمهاسملا فقومةيدقنلا حابرلأا تاعيزوت عم لاحلا:• ةميقب مهسلأا يلامجإ900رلاود فلأ• ةميقب ادقن100000رلاود

17-11Share ValuationIn chapter 7, the dividend discount model taught us that the price of a share is the PV of future cash flows per share. وه مهسلا رعس نأ حابرلأا مصخ جذومن انملع ، عباسلا لصفلا يفPV مهس لكل ةيلبقتسملا ةيدقنلا تاقفدتلل.What if the dividend is a repurchase, not a cash payment?؟ةيدقن ةعفد تسيلو ، ءارش ةداعإ نع ةرابع حابرلأا تاعيزوت ناك اذإ يفConsider the following two examples.نلااثملا يف رظنلا.

17-12Share Valuation: Example 1Case 1: A firm promises to pay dividends of $100,000 in perpetuity with 100,000 shares outstanding. Assume a discount rate of 11.1%. What is the present value of one of the firm’s shares? ةلاحلا1 : ةميقب ةيدقن حابرأ عفدب ةكرشلا دهعتت100000 عم دبلأا ىلإ رلاود100000ةمئاق مهس . مصخ لدعم ضرتفا11.1٪ .؟ةكرشلا مهسأ دحلأ ةيلاحلا ةميقلا يه ام

17-13Share Valuation: Example 2Case 2: This same firm decides instead to use the first year’s proposed dividends of $100,000 to repurchase 10,000 shares of stock. From year 2 onward it will resume annual dividends of $100,000. What effect does this have on the value of the shares? ةلاحلا2 : ةغلابلا ةحرتقملا ىلولأا ةنسلا حابرأ مادختسا كلذ نم ًلادب اهسفن ةكرشلا هذه تررق100000 ةداعلإ رلاود ءارش10000مهسلأا نم مهس . ماعلا نم2 ةغلابلا ةيونسلا حابرلأا تاعيزوت فنأتستس ، اًدعاصف100000رلاود . ام؟مهسلأا ةميق ىلع كلذ ريثأت وه

17-14Dividend PolicyDividends are surprisingly “smooth” annually, and managers are often reluctant to alter them. مهسلأا حابرأ ربتعت”ةسلس “اهرييغت يف نوريدملا ددرتي ام اًبلاغو ، اًيونس شهدم لكشب.Survey of Financial Executives: Views on Dividend Policyنييلاملا نيريدملا حسم :حابرلأا عيزوت ةسايس لوح ءارآ

17-15Information SignalingDividends and repurchases provide clues about a company’s true financial prospects.ةكرشلل ةيقيقحلا ةيلاملا قافلآا لوح ةلدأ ءارشلا ةداعإ تايلمعو مهسلأا حابرأ رفوت.Informational aspect of dividends حابرلأل يتامولعملا بناجلا•Dividend increases send good news about future cash flow and earnings. Dividend cuts send bad news.ةيلبقتسملا حابرلأاو ةيدقنلا تاقفدتلا لوح ةديج اًرابخأ حابرلأا تاعيزوت ةدايز لسرت .ةئيس اًرابخأ لسرت حابرلأا تاضيفخت.If management announces an unexpected cut in dividend payments, what do you predict will happen to share price for the firm? مهس رعسل ثدحي نأ عقوتت اذامف ، حابرلأا تاعوفدم يف عقوتم ريغ ضفخ نع ةرادلإا تنلعأ اذإ؟ةكرشلا

17-16The Payout ControversyWhat is the effect of a change in dividend payout policy, given a firm’s current capital budgeting and borrowing decisions?إ رظنلاب ، حابرلأا عيزوت ةسايس يف رييغتلا ريثأت وه ام ىل؟ضارتقلاا تارارقو ةكرشلل ةيلاحلا ةيلامسأرلا ةينازيملا

17-17Are Dividends Irrelevant?Franco Modigliani and Merton Miller (MM) showed that dividend policy does not alter firm value under the assumption of perfect financial markets. رليم نوتريمو ينايليدوم وكنارف رهظأ(MM) ضارتفا لظ يف ةكرشلا ةميق ريغت لا حابرلأا عيزوت ةسايس نأةيلاثم ةيلام قاوسأ دوجو.MM’s Dividend-Irrelevance PropositionUnder ideal conditions, the value of the firm is unaffected by dividend policy. ةكرشل مئلاملا ريغ حابرلأا ضرعMMحابرلأا عيزوت ةسايسب ةكرشلا ةميق رثأتت لا ، ةيلاثملا فورظلا لظ يف.

17-18Dividend Policy Irrelevance: ExampleCase 1: A firm plans to pay annual dividends of $5 per share in perpetuity, and shareholders expect an 8% rate of return. Assume 1,000,000 shares outstanding. What are the total dividends paid each period, and what is the present value of each share? ةلاحلا1 : اهردق ةيونس حابرأ عفدل ةكرشلا ططخت5 ةبسنب دئاع لدعم نومهاسملا عقوتيو ، دبلأا ىلإ مهسلل تارلاود8٪ . ضرتفا1000000ةقلعم مهس .؟مهس لكل ةيلاحلا ةميقلا يه امو ةرتف لك نع ةعزوملا حابرلاا يلامجا يه ام

17-19Dividend Policy Irrelevance: Example 2Case 2: In an attempt to increase share value, this same firm plans to instead pay annual dividends of $10 per share in perpetuity, and still shareholders expect an 8% rate of return. Assume 1,000,000 shares outstanding. What is the present value of each share? ةلاحلا2 : اهردق ةيونس حابرأ عفدل اهسفن ةكرشلا هذه ططخت ، مهسلأا ةميق ةدايزل ةلواحم يف10 دبلأا ىلإ مهس لكل تارلاود ةبسنب دئاع لدعم نوعقوتي نومهاسملا لازي لاو ،8٪ . ضرتفا1000000ةقلعم مهس .؟مهس لكل ةيلاحلا ةميقلا يه ام*Note:In order to pay the additional $5,000,000 in dividends and earn the same profits in the future, the firm must replace the lost cash with a new issue of shares.(continued on next slide)

17-20Dividend Policy Irrelevance: Example 2Case 2(Continued):*Note:The firm must now pay an additional $400,000 per year in dividends to the new shareholders: *ةظحلام : عفد نلآا ةكرشلا ىلع بجي400،000ددجلا نيمهاسملل حابرأك اًيونس ةيفاضإ رلاود:As long as the company replaces the extra cash it’s paying out, it will earn the same profits and pay our $5,000,000of dividends each year from year 2. $400,000of this will be used to satisfy new shareholders. ةميقب اًحابرأ عفدتو حابرلأا سفن بسكتس اهنإف ، هعفدت يذلا يفاضلإا دقنلا لدبتست ةكرشلا نأ املاطو5،000،000 اًءدب ماع لك رلاود ماعلا نم2 . مادختسا متيسو400،000ددجلا نيمهاسملا ءاضرلإ غلبملا اذه نم رلاود.

17-21Dividend-Irrelevance AssumptionsIn order for MM’s Dividend-Irrelevance Propositionto hold, we must assume an efficient capital market. مئلاملا ريغ حابرلأا تاعيزوت ضرع ىلع ظافحلا لجأ نم ةكرشلMM ،لاعف لام سأر قوس دوجو ضرتفن نأ بجي.

17-22Why Dividends May Increase ValueOnce we relax the assumptions of perfect and efficient capital markets, many investors claim dividends may actually increasevalue. ديزت دق حابرلأا نأ نيرمثتسملا نم ديدعلا معزي ، ةلاعفلاو ةيلاثملا لاملا سأر قاوسأ تاضارتفا نم ففخن نأ درجمبةميقلا نم عقاولا يف.Attracts natural clienteleنييعيبطلا ءلامعلا بذجيLeverages behavioral psychologyيكولسلا سفنلا ملع ززعيPrevents managers from wasting fundsلاوملأا رادهإ نم نيريدملا عنمي

17-23Why Dividends May Reduce ValueIf dividends are taxed more heavily than capital gains, a company that can convert dividends into capital gains should attract more investors. يتلا ةكرشلا ىلع بجيف ، لاملا سأر حابرأ نم ربكأ لكشب مهسلأا حابرأ ىلع بئارض ضرف مت اذإنيرمثتسملا نم ديزملا بذج ةيلامسأر بساكم ىلإ مهسلأا حابرأ ليوحت اهنكمي.All other things being equal, investors are willing to pay more for a stock whose returns come in the form of low-taxed capital gains.يتلا مهسلأا لباقم ديزملا عفدل دادعتسا ىلع نورمثتسملا نوكي ، ىرخلأا لماوعلا عيمج يواست دنعبئارضلا ةضفخنم ةيلامسأر بساكم لكش يف اهدئاوع يتأت.

17-24TaxationIn recent years, the case for low dividends has been weakened. حابرأ ىلع لوصحلل ةجحلا فاعضإ مت ، ةريخلأا تاونسلا يفةضفخنم.Top tax rates on dividends: 15% تلادعم ىلعأمهسلأا حابرأ ىلع بئارضلا :15٪Top tax rates on capital gains: 15% تلادعم ىلعألاملا سأر بساكم ىلع بئارضلا :15٪

17-25TaxationOne advantage to investors:نيرمثتسملل ةدحاو ةزيم:Capital gains taxes are deferrable.ليجأتلل ةلباق لاملا سأر حابرأ بئارض.One advantage to corporations:تاكرشلل ةدحاو ةزيم:Corporations pay corporate income tax on only 30% of any dividends received from investments in other corporations. عفدت ىلع تاكرشلا لخد ةبيرض تاكرشلا30 يف تارامثتسا نم ةملتسم حابرأ يأ نم طقف ٪ىرخأ تاكرش.

18-2Long-Term Financial PlanningFinancial plans establish a firm’s financial goals and provide a benchmark for evaluating performance.ييقتل اًرايعم رفوتو ةكرشلل ةيلاملا فادهلأا ةيلاملا ططخلا ددحت مءادلأا.This chapter analyzes long-term financial plans and provides a discussion of growth.ومنلل ةشقانم مدقيو لجلأا ةليوط ةيلاملا ططخلا لصفلا اذه للحي.

18-3Financial PlanningFirms plan for both the short term and the long term.ليوطلاو ريصقلا ىدملل تاكرشلا ططخت.Planning Horizonطيطختلا قفأ•Short-term planning: Plans for the next 12 months.•Long-term planning: Plans that exceed the next 12 months.ىدملا ريصق طيطختلا : ـلا رهشلأل ططخلا12ةمداقلا.ىدملا ليوط طيطختلا : ـلا زواجتت يتلا ططخلا12ةمداقلا اًرهش.

18-4Long-Term PlanningLong-term planning focuses on:ىلع ىدملا ليوط طيطختلا زكري:Long-term financial goalsInvestments required to meet these goalsFinancing that must be obtainedDividend policiesAppropriate debt ratiosىدملا ةليوط ةيلام فادهأفادهلأا هذه قيقحتل ةبولطملا تارامثتسلااهيلع لوصحلا بجي يذلا ليومتلاحابرلأا عيزوت تاسايسةبسانملا نيدلا بسن

18-5Focus on the Big PictureFinancial plans combine the planning of managers at every level, but they also reflect senior management’s strategic plans.لإل ةيجيتارتسلإا ططخلا اًضيأ سكعت اهنكلو ، تايوتسملا لك ىلع نيريدملا طيطخت نيب ةيلاملا ططخلا عمجت ةرادايلعلا.Firms don’t plan on a project-by-project basis. عورشم لك ساسأ ىلع تاكرشلا ططخت لاةدح ىلع.Small projects are aggregated and treated as one large project. عيراشملا عيمجت متيريبك دحاو عورشمك اهتجلاعمو ةريغصلا.BestCase ScenarioNormal GrowthScenarioWorst Case Scenario3 Plans in One:

18-6Why Build Financial Plans?Contingency Planningئراوطلل طيطختلاConsidering Optionsتارايخلا يف رظنلاForcing Consistencyقاستلاا رابجإ

18-7Financial Planning ModelsFinancial planning models help planners explore the consequences of alternative strategies.ليدبلا تايجيتارتسلاا بقاوع فاشكتسا ىلع نيططخملا يلاملا طيطختلا جذامن دعاستة.The effects of a change in sales on working capital will be seen in which section of a financial plan? ةطخلا نم مسق يأ يف لماعلا لاملا سأر ىلع تاعيبملا يف رييغتلا راثآ رهظتس؟ةيلاملا

18-8Percentage of Sales ModelsPercentage of Sales Modelsتاعيبملا جذامن ةبسن•Planning model in which sales forecasts are the driving variables and most other variables are proportional to sales. يه تاعيبملا تاعقوت هيف نوكت يذلا طيطختلا جذومنتاعيبملا عم بسانتت ىرخلأا تاريغتملا مظعمو ةعفادلا تاريغتملا.Why are they useful?Balancing Itemةنزاوم رصنع•Variable that adjusts to maintain the consistency of a financial plan.ةيلاملا ةطخلا قاستا ىلع ظافحلل هليدعت متي ريغتم.

18-9Percentage of Sales Models: ExampleA forecast using a percentage of sales model expects sales to increase by 12% annually over the next five years. If costs are proportional to sales at 80%, and last year’s sales were $1,000, what is the projected net income in year 5? يتلا تاعقوتلا عقوتت ةبسنب تاعيبملا ةدايز تاعيبملا جذومن نم ةيوئم ةبسن مدختست12ةلبقملا سمخلا تاونسلا ىدم ىلع اًيونس ٪ . ةبسنب تاعيبملا عم بسانتت فيلاكتلا تناك اذإ80 يضاملا ماعلا تاعيبم تناكو ، ٪1،000 وه امف ، رلاود؟سماخلا ماعلا يف عقوتملا لخدلا يفاص•Projected sales in year 5:•Projected COGS in year 5:

18-10Planning Model: ExampleAssume this year’s financial statements are as follows:Calculate pro forma statements for 2012, assuming:1.Sales and operating costs are expected to grow 10%.2.Interest rates will remain constant.3.The firm will continue to pay 2/3 earnings in dividends.4.The firm will need 10% more fixed assets and net working capital next year to support the higher sales volume.5. ماعل ةيلكشلا تانايبلا بسحا2012ضارتفاب ،:6. ةبسنب ليغشتلاو تاعيبملا فيلاكت ومنت نأ عقوتملا نم10٪.7.ةتباث ةدئافلا راعسأ ىقبتس.8. رادقمب حابرأ عفد يف ةكرشلا رمتستس2/3حابرلأا نم.9. ةبسنب رثكأ ةتباث لوصأ ىلإ ةكرشلا جاتحتس10 مجح معدل لبقملا ماعلا لماع لام سأر يفاصو ٪ىلعلأا تاعيبملا.

18-112,20010% higher1,98010% higher22010% higher40Unchanged180EBIT -Interest7240% of (EBIT –Interest)108EBIT –Interest -Taxes722/3 Net Income36Net Income -Dividends22010% higher88010% higher1,10010% higher400Temporarily Fixed636 Increased by retained earnings1,036Debt + Equity64 Balancing Item (1,100 –1,036)Required External FinancingPlanning Model: Example

18-12Planning Model: ExampleAssuming the firm uses debt as its balancing item, the 2ndround pro forma balance sheet will look like this:يلي امك ودبتس ةيناثلا ةلوجلل ةيبيرقتلا ةيمومعلا ةينازيملا نإف ، ةنزاوم رصنعك نيدلا مدختست ةكرشلا نأ ضارتفاب:Notice how the statement once again “balances” after use of the plug item. ىرخأ ةرم ةرابعلا نأ فيك ظحلا”ةدصرأ “تانوكملا رصنع مادختسا دعب.

18-13Planning Model LimitsPitfalls in Model Designجذومنلا ميمصت يف قلازملاPercentage of Sales Models Assumptions ةبسنلاتاعيبملا جذامن تاضارتفلا ةيوئملاFixed assets aren’t added in small incrementsةريغص تادايزب ةتباثلا لوصلأا ةفاضإ متت لا

18-14Planning Model LimitsPlanning models do not tell which plan is bestلضفلأا ةطخلا طيطختلا جذامن ربخت لاModels can tell how much money the firm must raise to fund its planned growth, but not whether that growth contributes to shareholder valu نأ جذامنلل نكمي ومنلا ليومتل اهعمج ةكرشلا ىلع بجي يتلا لاوملأا رادقم ددحت ةميق يف مهاسي ومنلا اذه ناك اذإ ام سيل نكلو ، اهل ططخملانيمهاسملا.e.

18-15External Financing and Growth

18-16External Financing and GrowthRequired External Financing(Growth Rate ×Assets)Reinvested Earnings=Example:A firm’s financial planners have projected a growth rate of 12% for the coming year. Currently, it has assets of $8,000,000 and retained earnings of $480,000. How much external financing will the firm need? ةبسنب ومن لدعم ةكرشلل نويلاملا نوططخملا عقوت12لبقملا ماعلل ٪ . ةميقب لوصأ اهيدل ، اًيلاح8 رلاود نييلام اهردق ةزجتحم حابرأو480رلاود فلأ .؟ةكرشلا هجاتحتس يذلا يجراخلا ليومتلا رادقم ام-

18-17Internal Growth Rate

18-18Internal Growth Rate: ExampleWhat is the maximum internal growth rate consistent with not requiring external funding for a firm reporting net income of $850,000, a dividend payout ratio of 35%, and total assets of $14 million? اهلخد يفاص غلبت ةكرشل يجراخ ليومت ىلإ ةجاحلا مدع عم قفاوتملا يلخادلا ومنلا لدعمل ىصقلأا دحلا وه ام850 فلأ غلبت حابرأ تاعيزوت ةبسنو ، يكيرمأ رلاود35 لوصلأا يلامجإو ، ٪14؟رلاود نويلم

18-19Sustainable Growth RateHow is the sustainable growth rate different from the internal growth rate?؟يلخادلا ومنلا لدعم نع مادتسملا ومنلا لدعم فلتخي فيكThe steady rate at which a firm can grow without changing leverage.ةيلاملا ةعفارلا رييغت نود ةكرشلا هب ومنت نأ نكمي يذلا تباثلا لدعملا.

18-20Sustainable Growth Rate: ExampleCalculate the rate at which a firm can grow without changing its leverage if its payout ratio is 35%; equity outstanding at the beginning of the year is $8,000,000; and its net income for the year is $1,500,000. دئاعلا ةبسن تناك اذإ ةيلاملا ةعفارلا رييغت نود ةكرشلا هب ومنت نأ نكمي يذلا لدعملا بسحا35 لاملا سأر ؛ ٪ وه ماعلا ةيادب يف قحتسملا8،000،000 ةنسلل اهلخد يفاصو ؛ رلاود1،500،000يكيرمأ رلاود.

McGraw-Hill/IrwinCopyright © 2012by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 19Learning Objectives1.Understand why the firm needs to invest in net working capital.2.Show how long-term financing policy affects short-term financing requirements.3.Trace a firm’s sources and uses of cash and evaluate its need for short-term borrowing.4.Develop a short-term financing plan that meets the firm’s need for cash.5.Identify several major sources of short-term financing.

19-2Short-Term Financial PlanningwShort-term financial planning focuses on managing a firm’s currentassets and liabilities.wThis chapter examines a number ofshort-term planning strategies and provides a greater understanding of how firms develop short-term financial plans.

19-3Short-Term PlanningShort-term financing needs are tied to the firm’s long-term decisions.wTotal Capital Requirement•The total cost of the assets that a firm needs to run efficiently.•Example: money invested in plant, machinery, inventories, accounts receivable, etc.

19-4Short-Term PlanningAs the business grows, it is likely to need additional fixed assets and current assets.•Note: The graph above illustrates the growth in the firm’s capital requirements. The line is upward-sloping, showing that as the business grows it is likely to need additional fixed assets and current assets.

19-5Planning StrategiesThree approaches:a)Relaxed Strategy-permanent cash surplusb)Middle-of-the-road Policyc)Restrictive Policy-permanent need for short-term borrowing•This surplus will likely be invested in marketable securities.•The firm has spare cash that it can lend out during the part of the year when capital requirements are low; the firm can borrow during the rest of the year when capital requirements are higher.•The firm has a permanent need for short-term borrowing.

19-6Planning StrategiesManagers typically list three considerations when determining the “best” mix of short-term and long-term financing:wMatching MaturitieswPermanent Working Capital RequirementswThe Advantages of Liquidity

19-7LiquiditySome firms choose to hold more liquidity than others.Why do many high-tech companies hold huge amounts of short-term securities while many manufacturers (ex. steel) hold much smaller reserves?What are the costs associated with holding excess cash?•There are often costs to holding surplus cash.•Holdings of marketable securities are at best a zero-NPV investment for taxpaying firms.•Managers of firms with large cash surpluses may be careless with funds.

19-8Working CapitalMuch of short-term financial planning focuses on variations in working capital.wComponents of Working Capital:èCurrent AssetsèCurrent Liabilities•Remember: Net working capital = (current assets –current liabilities)

19-9Working Capital: ExampleWhat will be the change in net working capital if current assets increaseby $170,000and current liabilities decreaseby $60,000?

19-10Current AssetswCommon current assets:èAccounts Receivable•Trade Credit•Consumer CreditèInventoryèCash & Marketable Securities•Demand Deposits•Time Deposits•Commercial Paper•Treasury Bills: Arise because customers don’t usually pay for their purchases immediately.: Arise due to unpaid bills from sales to other companies.:Arise due to unpaid bills from sales to the final consumer.:Raw materials, works-in-process, or finished goods awaiting sale and shipment.: money in checking accounts that the firm can pay out immediately.: money in savings accounts that can be paid out only with a delay.:short-term unsecured debt sold by other firms.: short-term debts sold by the U.S. government.

19-11Current LiabilitieswCommon current liabilities:èAccounts PayableèShort-term Borrowing

19-12The Cash Conversion CycleTypically, most firms have positive net working capital. But why do they need working capital at all?Simple Cycle of Operations•Net Working Capital–Current assets minus current liabilities. Often called working capital.

19-13The Cash Conversion CycleCash Conversion CycleInventory PeriodReceivables PeriodAccounts Payable Period=+-•Cash Conversion Cycle–Period between firm’s payment for materials and collection on its sales.•The longer the production process, the more cash the firm must keep tied up in inventories.•The longer it takes customers to pay their bills, the higher the value of accounts receivable.•If a firm can delay paying for its own materials, it may reduce the amount of cash it needs.•i.e.Accounts payable reduce net working capital.

19-14Useful RatiosWhy are these ratios useful?

19-15Cash Conversion Cycle: ExampleWhat is the cash conversion cycle for a firm with $3million average inventories, $1.5million average accounts payable, a receivables period of 40days, and an annual cost of goods sold of $18million?Cash Conversion Cycle (CCC)Inventory PeriodReceivables PeriodAccounts Payable Period=+-

19-16The Working Capital Trade-OffWorking capital can be actively managed; it is not set in stone.wCarrying CostsèCosts of maintaining current assets, including opportunity cost of capital.èWhat are some carrying costs associated with holding inventory?wShortage CostsèCosts incurred from shortages in current assets.•Example: accounts receivable are affected by the terms of credit the firm offers to its customers.•Example: The cost of the firm’s investment in receivables is the interest that could have been earned if customers paid their bills earlier.

19-17Changes in Working Capital: ExampleHow would the following affect cashand net working capital?wThe firm repurchases outstanding shares of stock.èBoth cash and net working capital will decrease.wThe firm uses cash on hand to buy raw materials.èCash will decrease; net working capital will be unaffected.wThe firm sells long-term bonds and puts the proceeds in its bank account.èBoth cash and net working capital will increase.

19-18Cash Budgetingw3Steps to preparing a cash budget:1.Forecast the sourcesof cash.2.Forecast the usesof cash.3.Calculate whether the firm is facing a cash shortage or surplus.The financial plangives the strategy for investing cash surpluses or financing any deficit.

19-19Sources of CashEnding AccountsReceivable=Beginning Accounts Receivable+Sales-CollectionsExample:What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000higher than ending, and $20,000was collected?

19-20Uses of CashwUses of cash can be split into four broad categories:èPayments of Accounts PayableèLabor, Administrative, and Other ExpensesèCapital ExpendituresèTaxes, Interest, and Dividend Payments

19-21The Cash BalancewAre large cash outflows in early periods generally a sign of trouble for a firm?wOur calculations only give us a best guess about future cash flows. èUndertake scenario analysis for better planning

19-22Short-term Financing Plan: Example (with calculations)

19-23Sources of Short-Term FinancingwBank loansèLines of CreditwSecured LoanswCommercial Paper•Agreement by a bank that a company may borrow at any time up to an established limit.•Debt that has first claim on specified collateral in the event of default.•Short-term unsecured notes issued by firms.

19-24Bank LoansThe simplest and most common form of short-term finance is a bank loan.wLine of Credit•Agreement by a bank that a company may borrow at any time up to an established limit.wTerm Loans•A loan that lasts for an extended period of time.wSelf-liquidating Loans•A loan that provides the cash to repay itself with the sale of goods.

19-25Secured LoansIf a bank is concerned about credit risk, it will demand that a firm provide collateral for the loan.wAccounts Receivable Financing•The firm assigns its receivables to the bank. wInventory Financing•The bank accepts the firm’s inventory as collateral.•Note: When borrowing short-term, the required collateral is generally restricted to liquid assets such as receivables, inventories, or securities.•If the firm fails to repay the loan, the bank can collect on the receivables and use the cash to repay the debt.but they will only choose collateral inventories that can be easily resold.Field Warehousing: An independent warehouse company hired by the bank supervises the inventory pledged as collateral for the loan.

19-26Commercial PaperLarge companies bypass the bank and issue commercial paperdirectly to large investors.Is commercial paper typically secured debt or unsecured debt?•Commercial Paper–Short-term unsecured notes issued by firms.

13-24Valuing Entire Businesses

13-26Valuing Entire Businesses: Example

21-2Mergers, Acquisitions and Corporate ControlThe Number of Mergers in the United States(1962-2009)

21-3Types of MergersHorizontal Mergerيقفلأا جامدنلااA merger between two firms in the same line of business (former competitors) لامعلأا لاجم سفن يف نيتكرش نيب جامدنا(نوقباس نوسفانم)Vertical Mergerيدومعلا جامدنلااA merger between companies at different stages of productionةفلتخملا جاتنلإا لحارم يف تاكرشلا نيب جمدلاConglomerate Mergerلتكت جامدنلااA merger between companies in unrelated lines of businessةطبترم ريغ لمع تلااجم يف تاكرشلا نيب جامدنا

21-4Sensible Reasons for MergersEconomies of Scaleيداصتقا سايقمEconomies of Vertical Integrationيسأرلا لماكتلا تايداصتقاCombining Complementary Resourcesةيليمكتلا دراوملا نيب عمجلاMergers as a Use for Surplus Fundsةضئافلا لاوملأا مادختسلا جامدنلاا تايلمع

21-5Economies of ScaleWith economies of scale, a larger firm may be able to reduce its per unit cost. ليلقت ىلع ةرداق ربكلأا ةكرشلا نوكت دق ، مجحلا تاروفو عمةدحولا ةفلكت.How?

21-6Economies of Vertical Integration Control over suppliers “may” reduce costs.Over-integration can cause the opposite effect. نيدروملا ىلع ةرطيسلا”دق “فيلاكتلا للقت.سكاعملا ريثأتلا يف طرفملا جامدنلاا ببستي نأ نكمي.Pre-integration (less efficient) قبسملا لماكتلا(ةءافك لقأ)CompanySSSSSSSPost-integration (more efficient) ام لماكتلا دعب(ةءافك رثكأ)CompanyS

21-7Combining Complementary Resources Merging may result in each firm filling in the “missing pieces” of their firm with pieces from the other firm. ءلمب ةكرش لك مايق ىلإ جمدلا يدؤي دق”ةدوقفملا عطقلا ” ةكرشلا نم عطقب اهتكرشلىرخلأا.Firm AFirm BExample: A small firm may have a valuable patent, but lack the engineering and sales organization necessary to produce and market it on a large scale. It could be acquired by a larger firm with those capacities already in place.لاثم : ةكرش كلتمت دققيوستو اهجاتنلإ يرورضلا تاعيبملاو يسدنهلا ميظنتلا ىلإ رقتفت اهنكل ، ةمّيق عارتخا ةءارب ةريغص ىلع اهعساو قاطن .لعفلاب ةدوجوملا تاردقلا هذهب ربكأ ةكرش لبق نم اهيلع لوصحلا نكمي.

21-8Use for Surplus FundsIf your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.What might this imply about the pre-and post-acquisition PVGO? عيراشم نم ليلق ددع دوجو عم ةجضان ةعانص يف كتكرش تناك اذإوه ذاوحتسلاا نوكي دقف ، تدجو نإ ، ةيباجيلإا ةيلاحلا ةميقلا يفاصكلاوملأ مادختسا لضفأ. صوصخب اذه هينعي دق يذلا امPVGO ؟ذاوحتسلاا دعبو لبق

21-9Dubious Reasons for MergersDiversificationThe Bootstrap Gameعيونت ةبعلBootstrap

21-10DiversificationDiversificationInvestors should not pay a premium for diversification since they can do it themselves.نوعيطتسي مهنلأ عيونتلل ةولاع نورمثتسملا عفدي لاأ بجي لعفمهسفنأب كلذ.

21-11The Bootstrap GameAcquiring Firm has high P/E ratio ةبسن اهيدل ةذوحتسملا ةكرشلاP / E ةيلاعSelling firm has low P/E ratio (due to low number of shares) ةبسن اهيدل عيبلا ةكرشP / E ةضفخنم(مهسلأا ددع ةلق ببسب)After merger, acquiring firm has short term EPS riseعافترا ةانتقملا ةكرشلا ىدل نوكي ، جامدنلاا دعبريصقلا ىدملا ىلع مهسلا ىلع دئاعلا يفLong term, acquirer will have slower than normal EPS growth due to share dilution. ىلع ومن نم أطبأ ومن ذوحتسملا ىدل نوكيس ، ليوطلا ىدملاEPS مهسلأا فيفخت ببسب يعيبطلا.

21-12The Bootstrap Game: Example

21-13The Form of the AcquisitionMerger–When the acquiring firm buys all the assets and all the liabilities of the other firm and combines them into one firm جامدنلاا- ىرخلأا ةكرشلا تامازتلا عيمجو لوصلأا عيمج ةذوحتسملا ةكرشلا يرتشت امدنعةدحاو ةكرش يف اهعمجتوTender Offer –The acquiring firm buys all the stock of the target firm ءاطعلا ضرع-ةفدهتسملا ةكرشلا مهسأ عيمج ةذوحتسملا ةكرشلا يرتشتAsset Purchase –When the acquiring firm buys only the assets of the target. The target continues to exist as firm with cash instead of assets لوصلأا ءارش-طقف فدهلا لوصأ ةانتقملا ةكرشلا يرتشت امدنع . لازي لا فدهلالوصلأا نم لادب دقنلا عم ةكرشك امئاق

21-14Evaluating MergersAsk:Is there an overall economic gain to the merger?Do the terms of the merger make the company and its shareholders better off?؟جامدنلال لماش يداصتقا بسكم كانه له؟لضفأ عضو يف اهيمهاسمو ةكرشلا لعجت جامدنلاا طورش لهSynergy

21-15Financing MergersMergers Financed by Cashاًدقن ةلومملا جامدنلاا تايلمعMergers Financed by Stockمهسلأا اهلومت يتلا جامدنلاا تايلمع

21-16Evaluating Mergers

21-17Evaluating Mergers: ExampleGiven a 20% cost of funds, what is the economic gain, if any, of the merger listed below? (GenPharm acquires Biotex) Which of the “sensible reasons” for a merger is this merger most likely based on?

21-18The Market for Corporate Control1.Proxy Contests2.Takeovers3.Leveraged Buyouts4.Divestures, Spin-Offs or Carve-Outsليكولا تاقباسمذاوحتسلاا تايلمعةيلاملا ةعفارلا ىلع ذاوحتسلااةعطتقملاو ةيضرعلا تادئاعلاو ديرجتلا تايلمع

21-19Proxy ContestsProxyليكولاThe right to vote another shareholder’s sharesرخآ مهاسم مهسأ ىلع تيوصتلا يف قحلاProxy Contestsليكولا تاقباسمTakeover attempt in which outsiders compete with management for shareholders’ votes ذاوحتسا ةلواحمنيمهاسملا تاوصأ ىلع ةرادلإا عم ءابرغلا اهيف سفانتيProxy Access (2010) ليكولا لوصو(2010)Problem with Proxy Contests?

21-20TakeoversTender Offer: a direct offer of purchase to current shareholders, without consulting with managementةصقانملا ضرع : رشابملا ءارشلا ضرعةرادلإا ةراشتسا نود نييلاحلا نيمهاسمللHow can management react to a tender offer?؟ءاطعلا ضرع عم لعافتت نأ ةرادلإل نكمي فيك

21-21Takeover Defensive TacticsWhite Knight سرافضيبأShark Repellent كمس دراطشرقلاPoison Pill مسلا ةبح

21-22Leveraged Buy-Outs (LBO)Large portion of buy-out financed by debt نم ريبك ءزجنويدلاب لومم لماكلا ءارشلاShares of the LBO no longer trade on the open market مهسأ دعت ملLBO لوادتتةحوتفملا قوسلا يفLeveraged Buyout vs. Management Buyoutيرادلإا ذاوحتسلاا لباقم عفرلا عم ذاوحتسلاا

21-23Potential Gains from an LBOJunk bond marketLeverage and taxesOther stakeholdersLeverage and incentivesFree cash flowهيف بوغرملا ريغ تادنسلا قوسبئارضلاو ذوفنلانيرخلآا ةحلصملا باحصأزفاوحلاو ذوفنلارحلا يدقنلا قفدتلا

21-24Divestitures, Spin-Offs, and Carve-OutsDivestitureديرجتلاWhen a firm sells some of the assets to another entity as a going concernةرمتسم ةأشنمك رخآ نايك ىلإ لوصلأا ضعب ةكرشلا عيبت امدنعSpin-Offجراخ رودتThe process of a business separating the ongoing operations of a unit of that business and giving the shareholders of the parent firm shares of the unit ةيلمعةدحولا يف اًصصح ملأا ةكرشلا يمهاسم حنمو لمعلا اذه نم ةدحول ةيراجلا تايلمعلا نيب لصفت يراجت لمعCarve-OutsتاعطتقملاSimilar to a spin-off, but issues shares of the new firm to the public ىلعروهمجلل ةديدجلا ةكرشلا مهسأ ردصت اهنكل ، ةيضرع ةكرش رارغ

21-25Benefits and Cost of MergersWho usually benefits from a merger?؟جامدنلاا نم ةداع ديفتسي يذلا نمWho usually loses in a merger?؟جامدنلاا ةيلمع يف ةداع رسخي يذلا نم

OptionsOptions trading ishow investors can speculate on the future direction of the overall stock market or individual securities, like stocks or bonds. Options contracts give you the choice—but not the obligation—to buy or sell an underlying asset at a specified price by a specified dateيلبقتسملا هاجتلاا ىلع ةبراضملا نيرمثتسملل نكمي فيك وه تارايخلا لوادتتادنسلا وأ مهسلأا لثم ، ةيدرفلا ةيلاملا قارولأا وأ لكك ةيلاملا قارولأا قوسل . رايخلا تارايخلا دوقع كحنمت- مازتللاا سيل نكلو-يساسأ لصأ عيب وأ ءارشلددحم خيرات يف ددحم رعسب..23-2

Types—There are four basic options positions:buying a call option, selling a call option, buying a put option, and selling a put option. With call options, the buyer is betting that the market price of an underlying asset will exceed a predetermined price, called the strike price, while the seller is betting it won’t.ةيساسأ تارايخ زكارم ةعبرأ كانه : ءارشو ءارش رايخ عيبو ءارش رايخ ءارشعيب رايخ عيبو عيب رايخ . رعس نأ ىلع يرتشملا نهاري ، ءارشلا تارايخ عم رعس ىمسملا ، اًقبسم ددحملا رعسلا زواجتيس يساسلأا لصلأل قوسلاكلذ لعفي نل هنأ ىلع عئابلا نهاري امنيب ، بارضلإا.23-3

23-4OptionsThe rightbut not the obligation… سيلو قحلا بجاولا…This chapter explores various options and their payoff structure. لصفلا اذه فشكتسيدودرملا اهلكيهو ةفلتخملا تارايخلا.

23-5Basic OptionsPut OptionThe right to sell an asset at a specified exercise price on or before the exercise date يف ددحم ةسرامم رعسب لصأ عيب يف قحلاهلبق وأ ةسرامملا خيراتCall OptionThe right to buy an asset at a specified exercise price on or before the exercise date ددحم ةسرامم رعسب لصأ ءارش يف قحلاهلبق وأ ةسرامملا خيرات يف

23-6Option ObligationsDoes the seller of a call option hope the price of the underlying security moves up or down? وأ ىلعلأ ةيساسلأا ةيلاملا ةقرولا رعس كرحتي نأ ءارشلا رايخ عئاب لمأي لهلفسلأDoes the buyer of a put option hope the price of the underlying security moves up or down? رايخ يرتشم لمأي له؟لفسلأ وأ ىلعلأ ةيساسلأا ةيلاملا ةقرولا رعس كرحتي نأ عيبلا

23-7Option ValueOption Value: The value of an option at expiration is a function of the stock price and the exercise price. رايخلا ةميق : ةميقةسرامملا رعسو مهسلا رعسل ةلاد يه ةيحلاصلا ءاهتنا دنع رايخلا.Call OptionPut Option

23-8Option Value: ExampleOption values given an exercise price of $720What are the payoff limits for call option buyers? Sellers?؟ةعابلا ؟ءارشلا رايخ يرتشمل عفدلا دودح يه امWhat are the payoff limits for put option buyers? Sellers?؟ةعابلا ؟عيبلا رايخ يرتشمل بساكملا دودح يه ام

23-9Call Option ValueCall option value (buyer) given a $720 exercise price.Share PriceCall option value720 840$120

23-10Call Option Profit$20 call option (buyer) given a $720 exercise priceShare PriceCall option value720 840$100

23-11Call Option ValueCall option payoff (seller) given a $720 exercise price.Share PriceCall option $ payoff720 840$-120

23-12Call Option Profit$20 call option (seller) given a $720 exercise price:Share PriceCall option $ payoff720 840$-120$-100

23-13Call Option: ExampleHow much must the stock be worth at expiration in order for a call holder to break even if the exercise price is $50 and the call premium was $4? لماح نكمتي ىتح ةيحلاصلا ءاهتنا دنع قحتسي مهسلا نوكي نأ بجي مك نيرمتلا رعس ناك اذإ ىتح رسك نم ةملاكملا50 ةملاكملا ةولاع ناكو اًرلاود4؟تارلاود

23-14Put Option ValuePut option value (buyer) given a $720 exercise price:Share PricePut option value600 720 $120

23-15Put Option Profit$30 put option (buyer) given a $720 exercise price:Share PricePut option value600 720 $90

23-16Put Option ValuePut option payoff (seller) given a $720 exercise price.Share PricePut option $ payoff600 720 -$120

23-17Put Option Profit$30 put option (seller) given a $720 exercise price.Share PricePut option $ payoff600 720 -$90

23-18Put Options: ExampleWhat is your return on exercising a put option which was purchased for $10 with an exercise price of $85? The stock price at expiration is $81. لباقم هؤارش مت يذلا عيبلا رايخ ةسرامم نم كدئاع وه ام10 رعسبو تارلاود غلبي ةسرامم85 وه ةيحلاصلا ءاهتنا دنع مهسلا رعس ؟اًرلاود81اًرلاود.

23-19Option Hedging StrategyProtective Put: Share PricePosition ValueProtective PutLong PutLong Stock

23-20Protective Put ValueShare PricePosition ValueProtective Put

23-21Call Option Value: Upper and Lower LimitsStock PriceUpper LimitLower Limit(Stock price -exercise price) or 0whichever is higher

23-22Call Option Value

23-23Call Option Value

23-24Black-Scholes Option Pricing Model OptionC = Ps[N(d1)] -S[N(d2)]e-rt

23-25Options on Real AssetsReal Options-Options embedded in real assets تارايخ ةيقيقح-ةيقيقحلا لوصلأا يف ةنمضم تارايخOption to ExpandOption to Abandon

23-26Options on Financial AssetsExecutive Stock OptionsWarrants Convertible Bonds Callable Bonds مهسلأا تارايخةيذيفنتلاتاركذم ةلباق ةمزحأيطللءاعدتسلال ةلباقلا تادنسلا

24-2Risk ManagementThe Financial Manager Faces Multiple Sources of Risk يلاملا ريدملا هجاويرطاخملل ةددعتم رداصمExchange Rate Riskفرصلا رعس رطاخمEnvironmental Riskةيئيبلا رطاخملاMarket Risk رطاخمقوسلاInterest Rate Riskةدئافلا لدعم رطاخمCompetitionةقباسمIndustry Changesةعانصلا تارييغتPolitical Risk رطاخملاةيسايسلا

24-3Why Hedge: To Add Value?Reason 1: Hedging is a zero-sum game. ببسلا1 :رفص اهتلصحم ةبعل طوحتلا.Reason 2: Investors’ do-it-yourself alternative.يناثلا ببسلا :كسفنب نورمثتسملا هلعفي يذلا ليدبلا.How should a financial manager approach hedging?؟طوحتلا عم يلاملا ريدملا لماعتي نأ بجي فيك

24-4A Sensible Approach to HedgingNote: Any sensible risk strategy must answer the same five questions.ةظحلام :ةسمخلا ةلئسلأا سفن ىلع ةلوقعم ةرطاخم ةيجيتارتسا يأ بيجت نأ بجي.1) What are the major risks that the company faces and what are the possible consequences?1 ) يه ام؟ةلمتحملا بقاوعلا يه امو ةكرشلا اههجاوت يتلا ةيسيئرلا رطاخملا2) Is the company being paid for taking these risks?2 )؟رطاخملا هذه لباقم ةكرشلل عفدلا متي له3) Can the company take any measures to reduce the probability of a bad outcome or to limit its impact?3 )؟اهريثأت نم دحلل وأ ةئيس ةجيتن ثودح ةيلامتحا ليلقتل تاءارجإ يأ ذاختا ةكرشلل نكمي له4) Can fairly priced insurance to offset any losses?4 ) يأ ضيوعتل لوقعم لكشب ًارعسم نيمأتلا نوكي نأ نكمي له؟رئاسخ5) Can derivatives, such as options or futures, hedge the risk?5 ) دوقعلا وأ تارايخلا لثم ، تاقتشملل نكمي له؟رطاخملا نم طوحتلا ، ةلجلآا

24-5Why Hedge?What is a cereal company in the business of doing?؟ةيراجتلا لامعلأا يف بوبحلا ةكرش يه امA. Producing a product efficiently and selling it fora profit.حبرلل هعيبو ةءافكب جتنم جاتنإ.B. Speculating on the price of sugar, wheat, and otherinputs for its product. حمقلاو ركسلا رعس ىلع ةبراضملاهجتنمل ىرخأ تلاخدمو.Answer: Both. The company does A by choice and B because it has no choice.امهلاك . ةكرشلا موقت”أ ” رايتخلااب”ب “رخآ رايخ اهيدل سيل هنلأ.

24-6Risk Management StrategiesThere are three principal ways to manage risk.رطاخملا ةرادلإ ةيسيئر قرط ثلاث كانه.Increasing FlexibilityInsurance PoliciesInvestments in Derivativesةنورملا ةدايزنيمأتلا تاسايستاقتشملا يف تارامثتسا

24-7Reducing Risk With Options: ExampleAbramovic, Inc. sells crude oil. Since its costs are relatively fixed, fluctuations in the sale price of crude oil can cause unexpected profits or losses. ةكرش عيبتAbramovicماخلا طفنلا . ًيبسن ةتباث اهفيلاكت نلأ اًرظن ، اأ اًحابرأ ببست نأ نكمي ماخلا طفنلا عيب رعس يف تابلقتلا نإف وةعقوتم ريغ رئاسخ.How might Abramovic, Inc. hedge this risk? نكمي فيك ةكرشلAbramovic،Inc. ؟رطاخملا هذه نم طوحتلا

24-8Reducing Risk With OptionsPrice per barrelAbramovic, Inc. loses money when prices drop. رسختAbramovic،Inc. امدنع لاملاراعسلأا ضفخنت.RevenuesAbramovic, Inc. sells crude oil. How does the price of oil influence revenues?

24-9Reducing Risk With Options: Example (continued)How might it hedge this risk?Price per barrelA put option makes money when prices drop. رسختAbramovic،Inc. امدنع لاملاراعسلأا ضفخنت.Revenues

24-10Price per barrelAbramovic, Inc.’s natural risk, plus a put option, provides a HEDGE against price declines.ةكرشل ةيعيبطلا رطاخملا رفوتAbramovic،Inc. ، ، عيبلا رايخ ىلإ ةفاضلإابراعسلأا ضافخنا دض اًطوحت.RevenuesReducing Risk With Options: Example (continued)What are the results of this strategy?Revenues

24-11Profit to seller= initial futures price -ultimate market priceIn order to account for price fluctuations, investors sometimes manage risk by investing in futures contracts. دوقعلا يف رامثتسلاا قيرط نع رطاخملا ةرادإب اًنايحأ نورمثتسملا موقي ، راعسلأا تابلقت باسح لجأ نمةلجلآا.Futures ContractsProfit to buyer= ultimate market price -initial futures price

24-12Future Contracts: ExampleFarmer Tom owns a wheat farm and wishes to hedge against a drop in the future price of wheat. ضافخنا نم طوحتلا يف بغريو حمق ةعرزم موت عرازملا كلتميلبقتسملا يف حمقلا راعسأ.What are the positions involved in this hedge?؟طوحتلا اذه اهيلع يوطني يتلا فقاوملا يه ام

24-13Future Contracts: Price of WheatThe farmer loses money when the price drops لاملا عرازملا رسخيرعسلا ضفخني امدنعPrice per bushelValue of wheatFarmer Tom owns a wheat farm. How does the price of wheat influence revenues?

24-14Future Contracts: Example (Continued)How might Farmer Tom hedge against this risk?The futures contract profits when prices drop. ةلجلآا دوقعلا حابرأ ضفخنت امدنعراعسلأا.Price per bushelValue of wheat

24-15Future Contracts: Example (continued)With a futures contract, the farmer locks in a price. موقي ، لجلآا دقعلا عم قلاغإب عرازملارعسلا.Price per bushelValue of wheatWhat are the results of this strategy?Value of Wheat

24-16Financial FuturesFinancial futures can be used to hedge against interest rate risk, exchange rate risk, and price fluctuations. ةدئافلا راعسأ رطاخم دض طوحتلل ةلجلآا ةيلاملا دوقعلا مادختسا نكميراعسلأا تابلقتو فرصلا راعسأ رطاخمو.Commodity FuturesFinancial Futuresعلسلل ةلجلآا دوقعلاةيلاملا ةلجلآا دوقعلا

24-17Forward ContractsIf the terms of a generic futures contract do not fit the investor’s needs, he can instead buy or sell a forward contract. ، رمثتسملا تاجايتحا بسانت لا ماعلا لجلآا دقعلا طورش تناك اذإلجآ دقع عيب وأ ءارش كلذ نم ًلادب هنكميف.Forward contracts are “custom-designed” futures contracts. They have specific amounts and expiration dates to meet the buyers’ needs. ةلجآ دوقع يه ةلجلآا دوقعلا”اًصيصخ ةممصم .” ةددحم غلابم مهيدلنيرتشملا تاجايتحا ةيبلتل ةيحلاصلا ءاهتنا خيراوتو.

24-18Forward Contracts: ExampleYou enter into a forward contract to take delivery of one million Euros three months from now. What happens to the price you will pay at expiration if Euros depreciate during the contract?نلآا نم رهشأ ةثلاث دعب وروي نويلم ملاتسلا لجآ دقع يف لخدت تنأ . يذلا رعسلل ثدحي اذام؟دقعلا للاخ ورويلا ةميق تضفخنا اذإ ةيحلاصلا ءاهتنا دنع هعفدتسThe price for the Euros will not change; it was fixed at the onset of the contract.دقعلا ةيادب يف هحلاصإ مت ؛ ورويلا رعس ريغتي نل.

24-19SwapsOne common way for firms to hedge against risk is to enter into a swap.Swap: Arrangement by two counterparties to exchange one stream of cash flows for another.ةضياقملا : نافرط هب موقي بيترترخآب ةيدقنلا تاقفدتلا نم دحاو قفدت لادبتسلا.CompanySwap DealerFixed rate paymentLIBOR paymentLIBOR obligationExample: Funding a variable-rate obligation with a fixed-rate payment.لاثم :تباث لدعم دادسب ريغتم رعسب مازتلا ليومت.ةضياقم يف لوخدلا يه رطاخملا نم طوحتلل تاكرشلل ةعئاشلا قرطلا ىدحإ

24-20Interest Rate Swaps: Floating Rate to Synthetic Fixed RateIn the previous example, the swapped rates cancel out any changes in LIBOR and the total payment from the company is fixed. لاثملا يف يف تارييغت يأ ةلدابملا راعسلأا يغلت ، قباسلاLIBOR نم دادسلا يلامجإ نوكيواًتباث ةكرشلا.

24-21Currency SwapsCurrency swaps are a subset of interest rate swaps; the loans are priced in different currencies. ؛ ةدئافلا راعسأ تاضياقم نم ةيعرف ةعومجم يه تلامعلا تاضياقمةفلتخم تلامعب ضورقلا ريعست متي.Why would a firm engage in a currency swap?؟تلامعلا ةضياقم يف ةكرشلا لخدت اذامل

24-22Currency Swaps: ExampleSuppose you have invested in a project in Japan that is financed with US bonds. ةيكيرمأ تادنسب لومم نابايلا يف عورشم يف ترمثتسا كنأ ضرتفنل.How would a currency swap be useful?؟ةديفم تلامعلا ةضياقم نوكت نأ نكمي فيكYou might enter into a currency swap so that you can emulate holding Japanese bonds.تادنسلاب ظافتحلاا ةاكاحم كنكمي ثيحب تلامعلا ةضياقم يف لوخدلا كنكميةينابايلا.

24-23Currency Swaps: ExampleCoca-Cola wishes to borrow yen (¥) to finance its Japanese operations. Coca-Cola believes the terms of the loan will be more favorable in the United States. It borrows $50,000,000 for 4 years at 3%. It arranges, through a swap dealer, to trade its future dollar liability for yen (the rate of the loan for yen is 4%). Suppose the spot exchange rate is $1 = ¥80. Below are the cash flows (in 000,000s) which occur as a result of the swap. نيلا ضارتقا يف لاوك اكوك ةكرش بغرت )(ةينابايلا اهتايلمع ليومتل . ةكرش دقتعتةدحتملا تايلاولا يف ةمءلام رثكأ نوكتس ضرقلا طورش نأ لاوكاكوك . ضرتقي50،000،000 ةدمل رلاود4 ةبسنب تاونس3٪ . نيلا لباقم رلاودلاب يلبقتسملا همازتلا لوادتل ، ةضياقم رجات للاخ نم ، بتري( وه نيلا لباقم ضرقلا لدعم4٪ .) نأ ضرتفا وه يروفلا فرصلا رعس1 رلاود =80ني . ةيدقنلا تاقفدتلا يلي اميف(نييلاملاب )ةلدابملل ةجيتن ثدحت يتلا.Year 0Years 1-3Year 4$¥$¥$¥Coca-Cola Dollar Loan+ 50-1.5-51.5Arrange Currency Swapa.Coca-Cola receives $-50+ 1.5+ 51.5b. Coca-Cola pays ¥+ 400-16-416NetCash Flow (000,000s)$0+ ¥400$0-¥16$0-¥416

24-24Hedging vs. SpeculatingHedgers reduce risk; speculators do little more than gamble. نم رثكأ نولعفي لا نوبراضملا ؛ رطاخملا نم نوللقي نوطوحتملاةرماقملا.Uninformed investors should use derivatives for hedging, not speculation. سيلو طوحتلل تاقتشملا مادختسا نيعلطملا ريغ نيرمثتسملا ىلع بجيةبراضملا.

24-25Derivative InnovationsDerivatives can be created to hedge against any risk a firm faces. The potential varieties are infinite.ةكرشلا اههجاوت رطاخم يأ دض طوحتلل تاقتشملا ءاشنإ نكمي .ةيئاهنلا ةلمتحملا فانصلأا.Example: A TV network may want to hedge the risk of a World Series game being rained out, foregoing advertising income. لاثم :لسلسلا باعلأ ىدحإ ضرعت رطاخم نم طوحتلا يف ةينويزفلت ةكبش بغرت دق ةتانلاعلإا لخد نع لزانتلل ةيملاعلا.Who might the counterparty be to such a contract?؟دقعلا اذه لثمل لباقملا فرطلا نوكي دق نم

24-26Appendix A: Worldwide Turnover in Futures Contracts

24-27Appendix B:Financial Futures / Forwards

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How much will a firm receive in net funding from a firm commitment underwriting of 300,000 shares priced to the public at $30 if a 10% underwriting spread has been added to the price paid by the underwriter? Additionally, the firm pays $600,000 in legal fees.

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