Midterm Reviewer

Corporate Finance

Tuesday, March 25, y

-it is the business of getting money from those who have it to lend or invest to companies that can put the money to work Role of corporate finance lawyers -represent companies, banks and investors, and various parties in corporate finance matters, they help their clients get deals done and are expected to assist and advise their clients after closing Corporate strategy The overall scope and direction of a corporation and the way in which its various business operations work together to achieve particular goals. Investment Decision -allocation of financial resources to the contemplated activities of the firm Financing Decision -determining how much debt and how much equity must be mobilized Dividend decision -relates to how much cash flow must be distributed now and how much must be retained to fund the future Illiquidity -exists when the firm is short of cash to meet immediate needs Insolvency -when aggregate liabilities exceed aggregate assets -cannot be fixed by short-term financing Matching liabilities with assets To avoid liquidity problems, it is generally considered prudent to match debt maturities to corresponding assets or cash flows from which the debt will be repaid The typical company will have a revolving credit facility providing short-term working capital or cash management financing, as well as longer-term debt matching capital assets or otherwise representing more long-term ballast in the capital structure Also, the financial officers generally try to manage maturities so that a company does not have large long-term debt repayments all coming due at one, creating the so-called exploding the balance sheet Fixed rate -bear interest at a stated rate of interest Floating rate -variable, rates may change from time to time depending on market conditions

Midterm Reviewer

Tuesday, March 25, y

Debt v

!quity
Debt Equity

bank debts, commercial papers, corporate bonds, owners equity, venture capital, common stock, leases, mortgages warrants Fixed claim Tax deductible Fixed maturity Residual claim Not tax deductible Infinite, higher risk of loss and volatility

No management control ; debt has the unique Management control; ordinary shareholders are the feature of allowing the borrowers to walk away owners of the business from their obligation to pay, in exchange for the assets of their company itself.

ebt is cheaper than equity although a high level of debt is difficult to manage for a business with volatile cash flows. leveraged recapitalization -debt is incurred to finance direct payouts to shareholders