Secrets To Building Business Credit
Increasing globalization and investor appetite for diversification offer a unique opportunity to companies looking to tap a new investor base, expand awareness or raise capital. Creating a depositary receipt program gives issuers flexibility and access necessary to achieve strategic goals, while providing investors with an easy and convenient way to invest in companies outside their home markets absent the concerns that normally accompany cross-border investments.
You can also make loans to businesses that need funds. There are two different ways you can make business loans. One is to lend money to someone who is selling their business. The business owner has found a buyer, but the only way the buyer can get financing to purchase the business is by taking back a seller-financed loan that the seller can sell to you, the investor. The security for these business loans is set up using a form called a Uniform Commercial Code document (UCC-1) that each state requires (which we also discussed in Chapter 2). The UCC-1 is the collateral instrument that you need to prepare when you are factoring or buying a business loan. A second way is to make a private business loan to a business owner for whatever the need is for example, the business might need cash to buy something, or maybe
Long term debt for firms can take one of two forms. It can be a long-term loan from a bank or other financial institution or it can be a long-term bond issued to financial markets, in which case the creditors are the investors in the bond. Accountants measure the value of long term debt by looking at the present value of payments due on the loan or bond at the time of the borrowing. For bank loans, this will be equal to the nominal value of the loan. With bonds, however, there are three possibilities When bonds are issued at par value, for instance, the value of the long-term debt is generally measured in terms of the nominal obligation created, in terms of principal (face value) due on the borrowing. When bonds are issued at a premium or a discount on par value, the bonds are recorded at the issue price, but the premium or discount to the face value is amortized over the life of the bond. As an extreme example, companies that issue zero coupon debt have to record the debt at the...
A financial market is a market where financial assets are traded. Financial assets are marketable financial claims issued by government and companies. Financial markets enable effective allocation of capital among competing uses. Financial markets perform four important economic functions. First, they enable individuals to choose more effectively between current and future consumption. Borrowing enables individuals to consume more whereas lending enables them to postpone consumption. The interest rate is the price of exchange. The units that have a surplus of capital invest in those that have a deficit. This provides producers with resources in excess of those generated by income. Second, the interaction between buyers and sellers in a financial market determine the price of a traded asset, say stocks, or alternatively, return demanded by investors to invest in a company. Firms can raise capital if the return on their investment exceeds the return demanded by investors. Third,...
All of this suggests that financial market reform and development is a key priority, which the Chinese authorities recognize. The pace of the reform has picked up since China joined the WTO in 2001. Enterprises might be less compelled to rely on internally generated funds if they have access to financial markets to raise capital. Increased access to credit for households, the availability of a wider range of saving instruments that would help them to diversify risk, and higher returns on their assets also could contribute to a reduction in household savings. Thus, building a broader-based, well-functioning financial market would help to rebalance China's economy by tilting domestic demand growth away from heavy reliance on investment toward consumption. Exchange-rate flexibility could have a role by providing more scope for monetary policy independence and helping cushion the economy from economic shocks. It could contribute to rebalancing the economy by improving investment...
Money market securities are short-term debt instruments sold by governments, financial institutions, and corporations. The important characteristic of these securities is that they have maturities when issued of one year or less. The minimum size of a transaction in a money market instrument is typically large, usually exceeding 100,000. In addition, some market securities that we will describe are not actively traded on exchanges. Given the minimum transaction size and the inactive trading of some securities, many individuals who wish to own these instruments will do so by holding a mutual fund (money market fund). These funds are discussed later in this chapter. The major money market instruments are listed in Table 2.1. Other Short-Term Instruments Although all short-term instruments are considered to have very low risk, they do tend to offer slight differences in returns according to the type and even specific institution that offers them. CDs (negotiable certificates of deposit)...
When a company wishes to raise capital, one of the ways it can do this is to issue stock. This is a particularly good method of raising funds, because it generates the required money without creating debt in the same way that borrowing does. It is excellent for the company and it is excellent for people like you, for you will then have an opportunity to trade the firm's stock and make a tidy profit.
Accountants categorize liabilities into current liabilities, long term debt and long term liabilities that are neither debt nor equity. Next, we will examine the way they measure each of these. 3. Short term portion of long term borrowing - representing the portion of the long term debt or bonds that is coming due in the next year. Here again, the value shown is the actual amount due on these loans, and market and book value should converge as the due date approaches. Long Term Debt Long term debt for firms can take one of two forms. It can be a long-term loan from a bank or other financial institution or it can be a long-term bond issued to financial markets, in which case the creditors are the investors in the bond. Accountants measure the value of long term debt by looking at the present value of payments due on the loan or bond at the time of the borrowing. For bank loans, this will be equal to the nominal value of the loan. With bonds, however, there are three possibilities When...
The second principle is the categorization of expenses into operating, financing and capital expenses. Operating expenses are expenses that, at least in theory, provide benefits only for the current period the cost of labor and materials expended to create products that are sold in the current period is a good example. Financing expenses are expenses arising from the non-equity financing used to raise capital for the business the most common example is interest expenses. Capital expenses are expenses that are expected to generate benefits over multiple periods for instance, the cost of buying land and buildings is treated as a capital expense.
Road shows This is an effective way for management to tell its story directly to investors. Sometimes called Non-Deal Road Shows, because companies aren't raising capital at the time, these are presentations where management travels to the offices of buy-side and sometimes sell-side analysts to
For example, a fund may have personnel with certain legal expertise in bankruptcy proceedings. Aside from discrete manager-oriented skill, market return drivers for distressed debt largely are oriented toward the movement in credit spreads. Narrowing credit spreads benefit owners of below-investment-grade debt. A narrowing of credit spreads indicates a decline in the yield premium for non-investment-grade credit over investment-grade corporate credit or risk-free government debt. A change in credit spreads can be influenced by overall economic health and the amount of capital in the market seeking non-investment-grade debt for purchase or sale. Corporate cash flow, interest rate cycles, and movements in capital markets also can impact credit spreads. Furthermore, a robust debt issuance market can enable issuers with nearly delinquent debt to sell less senior securities in order to repay secured credit. In addition to creating refinancing avenues, buoyant...
So in raising capital, you need to move outside meetings and toward building successful relationships with investors and their advisers proceed beyond the one-dimensional professional level. The gimme-your-money-and-get-lost syndrome will no longer suffice if, in fact, it ever has. You always get the capitalist along with the capital. To cultivate a relationship with investors, you must add value through the relationship. Properly managed, even investors who initially turn you down can end up providing feedback on your offering as well as guidance on your development and presentation. They can simultaneously provide you with a cost-effective way to cultivate investor referral. Again, those who refuse early may well become investors at a later, less risky stage of the venture's development. In raising capital, also get to know prospective investors who inquire about your venture before you have contacted them. Last year, more than 200 billion was donated to philanthropic causes, most...
Having a handle on analysts' estimates and the consensus estimate helps a company stay in control of its story and engage The Street as an active, participatory voice. But analysts are not just smart, calculating evaluators, they are human beings who rely heavily on trust to devise those estimates and recommendations. Not just any approach will do. Management must control this process, as it can be a significant part of building valuation and raising capital.
A number of macroeconomic trends are having significant impact on the entrepreneur's ability to find investors and to raise capital. These trends include a better understanding of undercapitalization's effect on building sustainable companies declining interest rates and the desirability of traditional debt and credit government intervention through tax incentives contraction of the institutional venture capital market and negative impact on the desirability of the alternative asset class and a moribund IPO market. Capital is the coal that stokes the fires of entrepreneurship in the United States. No capital, no start-up. No capital, no expansion. This everyone knows. Particularly for start-ups and small businesses, finance-related issues appear to be the number one cause of failure, according to Festervand & Forrest's extensive research prepared for the SBA. Eighty percent of new businesses fail because of undercapitalization. Major culprits include an inability to secure adequate...
East Asian firms had not only too much debt but also the wrong type of debt viz. short term. The average share of short-term debt in total debt was about 66 in Malaysia and Thailand in contrast with 25 in the USA and 45 in Germany. In addition, Korean and Malaysian firms had substantial share of foreign currency short-term debt. When the domestic currency is devalued, the value of foreign currency debt (denominated in, say, US dollars) increases. Sovereign governments may increase interest rates to stabilize their currencies. But this has a negative impact on corporate profitability. Analysts (especially credit) and rating agencies like Standard and Poor's (S&P) calculate several leverage ratios like interest coverage, debt service coverage long-term debt to capital ratio, etc. in rating long-term debt issued by firms. Credit ratings are supposed to reflect the ability and willingness of a firm to repay debt. Though rating agencies claim several qualitative factors in addition to...
Today's well-run REIT is a dynamic business. It achieves growth by increasing the operating income on the properties it owns and by raising capital for acquisitions and new property development. Good REIT managements are frequently able to raise such capital and find attractive opportunities.
The solution In evaluating working capital, you also need to track total capitalization and to monitor the company's long-term debt (bonds and notes). If you discover that a corporation is creating effective working capital by increasing long-term debt, it is usually a highly negative sign for several reasons. First, the practice creates an artificially positive-looking outcome but it is deceptive. Second, as long-term debt is increased, it places an ever-increasing burden on future cash flow and robs stockholders of future dividends. Because the corporation will have to repay the long-term debt and make interest payments, the higher that debt and the less profits there are to continue funding working capital or to declare dividends.
Incubators provide support within a close geographical locale for seed, start-up, and other early-stage companies looking to expand. Such support can come not only in funding but also in the form of a physical plant, office management, and marketing services. Corporate or university based, incubators help companies raise capital, offer technical assistance, and perform valuation. A fully functioning incubator could house a number of growing companies sharing a common business, for instance, in software. They also might share space and equipment and even professional guidance. The stage of development of incubators varies widely from state to state.
In addition, the person trying to raise capital has a dual burden compliance with federal SEC regulations as well as compliance with the regulations of the state Department of Corporations and Commissions. Even when the SEC has tried to reduce the cost and complexity associated with raising capital in private transactions, the states have chosen to take a more aggressive stance on their statutes. State regulations prevail, causing the nagging bottlenecks that have blocked capital in early-stage investment.
All stock markets have come under increasing pressure in recent years to make international alliances or mergers. Much of this pressure is due to the impact of electronic trading. To a growing extent, traders view the stock market as a computer network that links them to other traders, and there are increasingly fewer limits on the securities around the world in which they can trade. Against this background, it becomes more important for exchanges to provide the cheapest mechanism by which trades can be executed and cleared. This argues for global alliances that can facilitate the nuts and bolts of cross-border trading, and can benefit from economies of scale. Moreover, in the face of competition from electronic networks, established exchanges feel that they eventually need to offer 24-hour global markets. Finally, companies want to be able to go beyond national borders when they wish to raise capital.
I want you to know that whether you are a beginner or an advanced trader, it is important to know what to look for and how certain reports may affect the price behavior of the markets. Figure 1.10 shows what I see as the major focuses of economic reports here in the United Statees and what is in my opinion the order of importance. My selection holds true in all business cycles. The number-one focus should always be to read and to listen to what the voting members of central banks are looking at and on what they are basing their decisions to adjust interest rates. That makes sense, right So the releases of their FOMC meeting announcements are important, as well as the minutes of their last meeting. The minutes are released within two weeks of the last FOMC meeting. In Figure 1.10, I have two small branches from the FOMC meetings One is the Beige book heighten your awareness of this, as it is released two weeks prior to a Fed meeting. The other is the Federal Reserve districts business...
Any interest-bearing current liabilities, such as short-term debt and the current maturities of long-term debt, are not subtracted from operating invested capital since the financing cost associated with these liabilities is explicitly excluded from the NOPLAT calculation.
This provides the basis for a swap which will be to the mutual advantage of both parties. If both institutions directly issue funds in their final desired market, the total cost will be 9.5 (for A) and 6.5 (for B), for a total of 16.0 . In contrast, the total cost of raising capital where each has a comparative advantage is 5.0 (for A) and 10.0 (for B), for a total of 15.0 . The gain to both parties from entering a swap is 16.0 -15.0 1.00 . For instance, the swap described in Tables 10-2b and 10-2c splits the benefit equally between the two parties.
The balance sheet is a snapshot of a firm's assets, liabilities, and equity on the reporting date. Assets typically include current or short-term assets like cash, accounts receivable, and inventory fixed assets such as depreciable equipment and intangible assets like patents and trademarks. Liabilities include current obligations such as accounts payable and long-term debt. Shareholders' equity consists of all the various types of stock outstanding plus accumulated retained earnings. Relying exclusively on the balance sheet may be misleading At times, firms engage in window dressing (actions taken to strengthen the balance sheet for the particular reporting date). In addition, because assets are recorded at their historical values (their market values at the time they were first acquired), when the market value of assets declines, historical value overestimates the strength of the firm. Balance sheets may underestimate the financial health of a firm as well. For...
The simplest and most direct measure of how good a company is and how well it is run by its' management is the firm's financial performance. A well run company should raise capital as cheaply as it can, husband the capital that it has to invest well and find worthwhile investments for the capital. In the process, it should enrich investors in the company.
Forts of these past clients and contacts suggests that the most accurate predictor of an entrepreneur's success at raising capital is having successfully raised capital in the past. Based on an informal review of 4,000 records, 65 percent of those entrepreneurs who went on to successfully raise capital in their current rounds had raised capital previously from family, friends, co-founders, and angels and or professional venture capitalists. If you are among the 35 percent who have not yet raised capital from family and friends, who have not been subjected to thorough due diligence, or perhaps who have raised capital but did so before the dot-com bubble burst, stock market meltdown, and recession, just what do these findings mean to you We contend that by understanding what goes into the investor's decision making, entrepreneurs will be better able to position their ventures, documentation, offerings, and fund-raising presentations, and so increase the probability of a successful...
The valuation comparison is a comparison of financials across the company's comp group. IROs should construct a spreadsheet of all comps and their market cap, stock price, last year's earnings, next year's earnings estimates (the analyst consensus), long-term debt, last year's EBITDA (the con-
A company may decide to raise capital But there are several reasons why a company may decide to raise capital by issuing convertible bonds the issuer wants to raise capital on the market, but the controlling group does not want to surrender its majority or wants to delay capital dilution at least until maturity of the convertible bond
Even so, Buffett is convinced that the Post is in better shape than other media companies. There are two reasons for his optimism. First, the Post's long-term debt was more than offset by its cash holdings. The Washington Post is the only public newspaper that is essentially free of debt. As a result, explains Buffett, the shrinkage in the value of their assets has not been accentuated by the effects of leverage. 10 Second, he notes, the Washington Post Company has been exceptionally well managed.
Because timberland is a relatively new investment category, there are not many TIMOs in which to invest. Furthermore, most TIMOs are periodic in the capital formation cycles of their funds. As is the case with private equity, there may be lulls in the market for timber funds seeking to raise capital. Therefore, there may not always be private timber funds that are available to accept new investor capital at all points in time. The formation of timber funds also can be opportunistic and in response to tracts of timberland that are available to purchase. Many of these sales are by forest products manufacturing companies, governments, and estates seeking divestment of acreage. The market for these properties is very illiquid. The ability to purchase these properties often is driven by relationships, conservation concessions, and supply agreements.
The best way to avoid unwittingly renting to professional deadbeats and career criminals is to obtain consumer and business credit and criminal background reports on all tenant applicants to check, verify, and evaluate their credit and criminal histories. Contact the following credit reporting agencies to obtain credit and criminal background reports on tenant applicants
General Information In the General Information section of the input page, we entered various basic company data (see Exhibit 1.40). Momper Corp., ticker symbol MOMP, is a U.S.-based company that is listed on the NASDAQ. Momper reports its financial results based on a fiscal year ending December 31 and has corporate credit ratings of Ba2 and BB as rated by Moody's and S&P, respectively. Momper's predicted levered beta is 1.25, as sourced from Barra (see Chapter 3). We also determined a marginal tax rate of 38 from Momper's tax rate disclosures in its 10-K.
Published by National Register Publishers at www.nationalregisterpub.com. This directory lists 1,600 investment sources and 1,800 professional service firms. A handy resource for entrepreneurs seeking financial intermediaries to assist them in raising capital.
There may be other aspects of a self-inflicted basis that are assisting in the possible marginalization of venture capital as an asset class. These include the unilateral decision by some venture capital firms to progressively limit their availability. Although there has been a long-term trend for highly sought-after venture funds to limit allocations made available to investors, some venture firms are eliminating new capacity altogether for some long-term investors in their prior funds. This trend toward increased selectivity is in some cases at the expense of independent funds of funds that cannot offer any bilateral value-added relationship. The rationale for a venture capital firm's finding certain investors' capital of higher monetary value than others is rooted in a desire to be closer to the end investor. There also appears to be a desire to limit competition from other venture capital firms for high-quality deals as the venture capital funds of funds base has grown. Funds of...
Nil FFO can grow two ways externallyby acquisitions developments and the creation of ancillary revenue streams and
REIT investors and analysts need to understand exactly how much of a REIT's growth is being achieved internally and how much is being achieved externally. External growth, through new developments, acquisitions, and the creation of ancillary revenue streams, may not always be possible, because of a lack of available, high-quality properties at attractive prices, inability to raise capital, or the high cost of such capital. Internal growth, on the other hand, since it is organically generated through a REIT's existing resources, is more under management's control (though it is subject to real estate market dynamics).
Most listed Chinese firms have been created from formerly state-owned or state-controlled enterprises (SOEs). This makes them very different from the typical IPO. In the US or UK, firms tend to begin as a privately held company and then opens up to market ownership. In China, the primary reason for creating the stock markets was to allow state-owned enterprises (SOEs) to raise capital from Chinese households and from foreign entities. Other domestic institutions buy some of the other shares. Typically the state retains shares in these companies and uses the IPO process as a means to replace state responsibility for investment and employment in the enterprise. So share ownership is divided into state (central or local government), legal-entity (other domestic institutions including listed companies, SOEs and banks) and tradable shares. State and legal-entity shares are not traded publicly creating a class of shares similar to crossholding shares in Japan and Germany. Tradable shares...
Municipal (also known as muni) money market funds invest in short-term debt issued by state and local governments. All municipal money funds are free of federal taxes. Those investors who limit their investing to just one state are free of state taxes as well (provided you live in that state). So if you live in New York and buy a New York municipal bond fund, you shouldn't have to pay any tax, state or federal, on your dividends.
Using specific formulas in combination reveals hidden facts. The use of any one ratio reveals part of the picture. But to truly understand what is going on, you need to have all of the pieces. For example, testing working capital by tracking current assets and liabilities (through the current ratio) is instructive, but to see the entire picture, you also need to track long-term debt. Watching revenues over time is also useful, and most investors like to see revenues rise each year. But if profits are flat or falling, the rise in revenues is not useful so you also need to track expense levels and profits each year.
When a corporation encounters financial difficulty, it is likely to resort to debt financing to keep afloat. In this situation the firm can easily reach its debt capacity (to raise capital it has to pay a large interest rate, but the large rate tends to insure that it cannot pay the debt owed). But with a growing profitable firm the amount of debt used is likely to be well below the maximum debt amounts illustrated in the preceding example. Why does management stop well short of the debt amounts indicated by the models
Looking in the wrong area for confirmation. Finding valid confirmation requires some experience. When seeking confirmation from other trends or applying other ratios, make sure they do confirm the original indicator. It makes sense to confirm an apparent trend in working capital by also reviewing long-term debt and capitalization it would make no sense to draw conclusions about working capital based on trends in fixed asset depreciation. And the strong relationship between sales, costs, expenses, and profits points the way to important trends and the use of valuable ratios but you cannot judge profitability by isolating a review to changes in accounts receivable or inventory levels alone. While those current account levels will certainly change during periods of expansion in revenues, they are not going to tell the whole story. 6. Overlooking obvious danger signals, such as chronic operating losses. Everyone has heard the theme that reporting a net loss is all right. There is no...
State and local authorities also issue municipal notes, which are short-term debt instruments with maturities ranging from about 60 days to one year. They are usually available in denominations of about 25,000. Municipalities use this type of financing as an interim step when they are expecting future revenue. For example, a municipality might issue tax anticipation notes while it waits for tax revenues to be paid. The safety of the issue depends on the security and the amount of the tax revenue the municipality expects to receive. Bond anticipation notes are issued when a municipality anticipates funds from a bond issue. For example, an issuer might delay a bond issue because of poor market conditions or because it wants to combine several projects into one larger issue. To tide it over while it waits, the municipality might issue BANs. Revenue anticipation notes are similar and are issued in anticipation of revenue coming in from the state or federal government.
What about the business Expeditors was growing expeditiously indeed Since 1995, its revenues had risen at an average annual rate of 19.8 , nearly tripling over the period to finish 1999 at 1.4 billion. And earnings per share had grown by 25.8 annually, while dividends had risen at a 27 annual clip. Expeditors had no long-term debt, and its working capital had nearly doubled since 1995. According to Value Line, Expeditors' book value per share had increased 129 and its return on capital had risen by more than one-third to 21 .
They also look at a number of financial ratios like interest coverage, cash flow as a percentage of total debt, and long-term debt as a percentage of capitalization to rate an issue. The amount of debt a project can support depends on the amount of cash flow the project can generate to service debt - interest and principal, credit support available to the project, and the lender's coverage requirements. Two ratios are widely used to measure a project's ability to service debt interest coverage ratio and debt service coverage ratio.
The political-legal changes discussed in the previous section made investment banking possible. They created a private sphere in which contracting could occur independently of the state, but subject to its powers of enforcement. The corporate form was separated from the state and anchored in the private sphere, and the rules governing its use were increasingly standardized across America. The negotiability of corporate credit was established, and the legal impediments to geographically distant arm's-length financing were dismantled.
Fannie Mae and Freddie Mac were granted the top rating for Senior Long-Term Debt both by Moody's Investors Service and by Standard & Poor's, even though the US government does not guarantee their bonds directly. Each corporation, however, has a 2250 million credit line open with the US Treasury Department, and is subject to the supervision of the Office of Federal Housing Enterprise Oversight.
Table 19-1 presents the interpretation of various credit ratings issued by the two major rating agencies, Moody's and Standard and Poor's. These ratings correspond to long-term debt other ratings apply to short-term debt. Generally, the two agencies provide similar ratings for the same issuer.
Ladders, in particular for cautious investors, should be constructed from government (including high-quality municipal) bonds. With good-quality longer-term corporate bonds there is always the risk of deterioration in credit quality, and this risk obviously increases with longer maturity bonds. When constructing a long-term bond ladder designed to provide dependable income, it is safest to assume that there is no such thing as a blue-chip, safe-as-houses corporate credit risk. (See Chapter 8 for how corporate credit risk evolves over time.) An investor who wishes to take advantage of the higher yields available from assuming credit risk should follow a professionally managed approach to investing in credit risk, and forgo the concept of a bond ladder. Investors can easily see sample portfolios (for example, mutual fund portfolios) of the most highly respected fixed-income portfolio managers. These will show that credit risk is well diversified with modest exposures to individual...
Capital structure refers to the relative proportions of a company's different funding sources, which include debt, equity, and hybrid instruments such as convertible bonds (discussed below). A simple measure of capital structure is the ratio of long-term debt to total capital.
(concluded) has been virtually a new accounting system without any The boundaries of corporations are becoming in- set rules, in which companies have been free to show creasingly blurred, says Mr. Lev. It's very well defined their performance any way they deem fit. legally what is inside the corporation but . . . we must Finally, add to the equation the increasing impor-restructure accounting so the primary entity will be the tance of a rising stock price, and investors face an uneconomic one, not the legal one. precedented incentive on the part of companies to Because of the leeway in current accounting rules, obfuscate. No longer is a higher stock price simply de-two companies in the same industry that perform iden- sirable, it is often essential, because stocks have be-tical transactions can report different numbers. Take come a vital way for companies to run their businesses. the way companies can account for research-and- The growing use of stock options as a way of...
The risk is that if you're mixing personal and business funds, then you really aren't running your corporation or LLC like a real business. In other words, if you take a trip to the Bahamas on your business's credit card, someone may be able to pierce the corporate veil. This means that a business creditor can claim that because you aren't running your business like it should be run she may be able to come after your personal stuff. Signing personally on real estate or business loans
Railroad financing was dominated by firms who had the reputation and contacts to raise capital in Europe, either directly, as in the case of the Morgan firms and Kuhn, Loeb, or indirectly, as with Kidder, Peabody, who relied upon their relationship with the Barings. Although these private banks underwrote many of the railroad issues, they never came close to monopolizing the railroad business outside the major East Coast cities, commercial bankers were the main underwriters and distributors of railroad securities.48
You already know that you must be able to determine market values and rental values accurately. In your target area you will track these two factors continuously and be able to apply them to any particular property. But you also will want to follow the local trends that affect those values. You will keep track of business growth, new construction, zoning changes, highway construction, recreational development, and any other factors that might indicate increased population, employment, and housing demand.
When a company issues new long-term debt, it's important for investors to understand the reason. Companies should give explanations of new debt's specific purpose rather than vague boilerplate such as it will be used to fund general business needs. The most common purposes of new debt include the following
There were certainly some structural problems behind the financial crisis of 1997, including (1) tendency to finance long-term debt with short-term paper due to a lack of well-developed derivatives market, (2) inadequate attention to social safety net for the unemployed and the poor during boom times, (3) excess exploitation of natural resources as forests, fisheries, and so on, and (4) poor regulation of domestic capital markets that did not check global push toward a financial bubble. The global capital flows grew too fast (30
Raising capital Of all of these topics, raising capital interests budding entrepreneurs the most. When people ask me how to learn to raise capital, I refer them to numbers 1 through 7 above, explaining that raising capital requires each of them in one way or the other. Most businesses do not get off the ground because the entrepreneur does not know how to raise capital, and as rich dad said, Raising capital is the entrepreneur's most important job. He did not mean that the entrepreneur was constantly asking for money from investors. What he meant was that an entrepreneur was always ensuring that capital was flowing in, either through sales, direct marketing, private sales, institutional sales, investors, etc. Rich dad would say, Until the business system is built, the entrepreneur is the system to keep the money flowing in. At the start of any business, keeping the cash flowing in is the entrepreneur's most important job.
In summary, the inputs to the ValuePro Program relating to the cost of debt are an estimate of the current yield associated with long-term debt of the corporation, as represented as a spread to Treasuries the company's tax rate and the amount of debt outstanding. For simplicity, use book value of debt if market value isn't available.
For every stock, subtract the company's current liabilities from their current assets. If there is a residual number, then subtract the figure for the company's long-term debt. If there is no residual number, cross the stock off your list. You must have a positive value after subtracting the short-and the long-term debt from current assets or the stock does not qualify.
Nillil The importance of attractive investment opportunities to a REITs FFO growth rate and stock price cannot be
Many REIT executives talk about FFO accretion, or the difference, or spread, between what the REIT can earn on its invested capital (for example, the cash flow that a newly acquired apartment will provide to the REIT buyer) and the REIT's cost to obtain that invested capital. But we need to be very careful here. The true cost of capital for any company that uses long-term debt is a combination of the cost of equity and the cost of debt. The cost of debt capital is fairly straightforward it is simply the interest that the REIT pays for borrowed funds. However, we should use long-term interest rates, since drawdowns under a credit line and other forms of short-term debt are temporary and must be repaid relatively quickly furthermore, they are subject to interest-rate fluctuations. Calculations should be based on rates for debt that will be outstanding for seven to ten years, which will usually be higher than short-term interest rates. Using the short-term rate would distort the picture,...
Portfolios of two risky assets are relatively easy to analyze, and they illustrate the principles and considerations that apply to portfolios of many assets. We will consider a portfolio comprised of two mutual funds, a bond portfolio specializing in long-term debt securities, denoted D, and a stock fund that specializes in equity securities, E. Table 8.1 lists the parameters describing the rate-of-return distribution of these funds. These parameters are representative of those that can be estimated from actual funds.
Covenants are provisions banks attach to long-term debt that trigger technical default when violated by the borrowing company. Such a default will lower the credit rating, increase the interest (cost of borrowing), and often send the stock lower. Bond covenants include but are not limited to the following
Many Chinese companies list their shares on U.S. exchanges in the form of American depositary receipts (ADRs) to raise capital and gain liquidity and prestige. American investors use ADRs to diversify their portfolios globally and reduce risk. ADRs allow investors who do not or cannot invest directly in non-U.S. dollar-denominated securities overseas to do so. ADRs overcome the mechanical difficulty of making trades in countries whose market hours do not correspond to those in the United States. Market hours in China do not overlap at all. As a result, Chinese ADRs present an efficient, cost-effective, and liquid way to make specific investments in Chinese companies.
The second type of footnotes provide additional disclosure that cannot be placed in the main body of the financial statements. For example, the maturity dates, interest rates, collateral, or other security provisions, and many other details of the long-term debt of a business are presented in footnotes. Annual rentals required under long-term operating leases are given. Details regarding stock options and employee stock ownership plans are spelled out, and the potential dilution effects on earnings per share are illustrated in a footnote. Major lawsuits and
I have discussed how a sale and leaseback can be one method for a property owner to raise capital while at the same time keeping the use of a property. This type of lease is generally the sale of a property tied to a leaseback by the seller, but may also be a sale with a lease that is obtained by the seller prior to or shortly after the closing of the sale. Because every property has different rights that can be sold or leased, it is possible to separate each of them so that some of these rights are sold, while others are leased or retained. Take a look at some of the rights that you may own when you own a vacant tract of land.
Securities Act of 1933 allows public companies to raise capital through private placements of unregistered securities. Private placements are cheaper and less time consuming than public issuances of securities and are thus an attractive alternative. In a Regulation D strategy, a hedge fund manager takes a long position in privately placed unregistered securities (stocks, convertibles, options, or warrants) issued by a publicly traded small or micro capitalization company.
The recent increase of the federal government's share in the U.S. economy from 23 percent to 25.4 percent of GDP has been funded because U.S. banks have shifted from their traditional lending activities to buying government securities. The slowdown in economic growth has resulted in fewer borrowers overall those who are trying to borrow tend to be of a lower credit quality. Since March 1989, banks have increased their holdings of government securities by about 300 billion while reducing their business loans outstanding by around 15 billion. This process has already hurt government revenues and ballooned the deficit. It can't continue much longer.
Long-term debt Fixed-rate Fixed-rate debt is typically presented separately from variable-rate debt. In the prior year (2002), less than 20 of the company's long-term debt was held in variablerate bonds. In the current year, Mandalay carried almost 1.5 billion of variable-rate debt ( 995 million of variable-rate long-term debt and 500 million of a pay floating interest rate swap) out of 3.5 billion in total (leaving 2 billion in fixed-rate debt).
You need to raise capital to acquire firms that are poorly managed and any constraints on that process can impede hostile acquisitions. It should come as no surprise that hostile acquisitions are rare in economies where capital markets - equity and debt -are not well developed. In fact, for much of the last century, badly managed companies in Europe were at least partially shielded from hostile acquisitions by the absence of an active corporate bond market and the reliance of companies on bank loans. The acquisition of Telecom Italia by Olivetti in 1999, which was one of the very first large hostile acquisitions in Europe, was facilitated by Olivetti's use of the nascent Euro bond market. It is entirely possible that Olivetti would have failed in its bid, if it had to approach Italian banks for the same funding.
It is important to be aware of operating lease agreements because economically they are long-term liabilities. Whereas capital leases create liabilities on the balance sheet, operating leases are a type of off-balance sheet financing. Many companies tweak their lease terms precisely to make these terms meet the definition of an operating lease so that leases can be kept off the balance sheet (improving certain ratios like long term debt-to-total capital). Long-term debt is a very tiny 2 of total assets ( 19 million out of 1 billion). However, as described by a footnote, most of the company's stores utilize operating leases rather than capital leases The present value of the combined lease commitments is almost 1 billion. If these operating leases are recognized as obligations and therefore manually put back onto the balance sheet, both an asset and a liability of 1 billion would be created, and the effective long term debt-to-total capital ratio would go from 2 to about 50 ( 1 billion...
It's so interesting to watch you go through your decision-making process. You must realize these guys and gals are on TV, all dressed up and made up, marketing themselves to the media with the clear intention of either raising capital or trying to create a broader media image for themselves, instead of being in their offices serving their clients by overseeing their investments.
Next we must consider how to construct a measure that will permit us to compare the rate of return of debt instruments having different cash flows and different maturities. For 1-period debt instruments, the measure is clear it is provided by the left-hand side of equation (20.1). But that approach cannot be generalized readily to long-term debt instruments. For instance, for an instrument with a cash flow (ai, a2), the measure (ai + a2) P0 would not be a useful measure of yield. In the first place, if we seek a measure that can be used to compare instruments of different maturities, it must measure return per unit of time. And second, the proposed measure ignores the timing of receipts, thus failing to reflect the time value of money.
Those market participants interested in long-term bonds would not want to buy long-term bonds because they would expect the yield structure to rise sooner or later, resulting in a price decline for the bonds and a capital loss on the long-term bonds purchased. Instead, they would want to invest in short-term debt obligations until the rise in yield had occurred, permitting them to reinvest their funds at the higher yield.
Now remember we said that pension plans are off-balance-sheet financing, and in PepsiCo's case, the 4.245 billion in assets and 5.214 billion in liabilities are not recognized on the balance sheet. Therefore, typical debt ratios like long-term debt to equity probably do not count the pension liability of 5+ billion. But it's even worse than that. You might think the net deficit of - 969 million would be carried as a liability, but it is not. Again, from the footnotes
The 1997-1998 financial crisis that emerged in Asia and contaminated later on nearly all LDCs had little to do with the previous crisis scenario. Many of the East Asian economies had robust savings mobilization and high living standards, large foreign investment flows, and buoyant economic growth without inflation or fiscal imbalances. The crisis stemmed from a combination of overvalued exchange rates and the accumulation of short-term debt by the private sector. But the root causes of these two crisis triggers is to be found in basic flaws in the region's domestic financial sectors, including the following directed credit and administered interest rates the lack of international standards in regulation, accounting, and operating policies poor and non-transparent supervision the lack of medium or long-term local currency debt markets and the scarcity of adequate equity in both the financial and corporate sectors. This financial debacle led to a new round of protracted crises and...
Here's an example of a business loan Lisa advised an investor not to make because she didn't think it was a good investment. A successful, family-run Korean restaurant in Los Angeles was put up for sale by the longtime owners following the death of the father, who had been the principal manager of the restaurant. His widow did not want to keep the restaurant, and none of her children wanted to run it. She decided to sell it, but she wanted to sell it to another Korean because she had an emotional interest in keeping it as a Korean restaurant. Because the prospective owner was Korean, spoke Korean, and had restaurant experience, the widow thought he was a good choice to whom to sell her business. The prospective owner could not get full financing to buy the business, so he needed to take out a business loan. However, he had no assets of any real value. Lisa advised the investor not to make the deal because there were too many uncertainties whether the new owner could maintain the...
Who on the team has run a business There is a big difference between running a business and dreaming of a new product or a new business. Has the person handled payroll, employees, tax issues, legal issues, contracts, negotiations, product development, cash flow management, raising capital, etc.
Before the play begins and 224,000,000 shares outstanding. The market capitalization was 11.2 billion. The corporate tax rate was .34. A reasonable debt rate for a highly levered firm was .12. For 1988 RJR's cash flows from operations were 1,480 million. The income taxes paid were 682 million and interest paid was 486 million (long-term debt was 4,975 million). The net income applicable to common stock was 1.378 billion and income to its total equity was 1.393 billion. Cash dividends on common stock were 475 million.
Cash inflows from financing activities as they pertain to income-producing properties include the issuance of long-term debt or equity securities, as well as funds obtained through any type of borrowing activity. For example, a real estate investment company may obtain a mortgage to purchase an office building to add to its portfolio of properties, or it may secure a line of credit to make capital improvements. Cash outflows from financing activities include the
If you are ready to try your hand at raising capital for your business, you may want to start with a PPM. Peter recommends starting with this for these reasons 4. You begin formally talking to potential investors as well as get to practice the art and science of raising capital. First, you may need to overcome your fear of asking. Second, you may need to get over your fear of criticism. Third, you get to learn how to handle rejection or phone calls that are not returned. Peter also says the same thing my rich dad said If you want to be in this business, you must know how to sell. Selling is the most important skill you can learn and continue to improve. Raising capital is selling a different product to a
Another common financing arrangement between multiple parties is a partnership wherein none of the parties live in the property. This chapter will discuss the basic partnership investment. Larger investments through limited partnerships and other corporate entities in a pool of money are known as syndications. These investments are generally classified as securities, so compliance with state and federal regulations is complex. Thus, syndications are generally not recommended for financing smaller projects because the legal fees for compliance with securities laws will far exceed the benefit of raising capital through multiple investors.
Since its inception, microfinance has struggled to raise capital to meet the demands of millions of economically active poor households across the world. This demand2 cannot be fully met by donor agencies, making commercial investments therefore necessary. The industry has already made significant progress in linking up with the commercial finance mainstream by increasingly promoting the commercial viability of microfinance institutions, by generating awareness and by advocacy, thereby creating an interest among potential investors. MFIFs have emerged as vehicles for linking the microfinance and mainstream commercial markets.
Aspect of a company's ability to remain competitive is its relative capital strength. If a company is depending increasingly on long-term debt to fund growth, an increasing portion of future earnings will have to go to debt service, leaving less capital for expanded operations and dividend payments. So a negative trend in capitalization is an alarming signal in your conservative portfolio. Tracking working capital is another method for judging a corporation's financial health. Changes may be subtle, but trends can be observed over time, and what you seek is a company that is able to anticipate cyclical change through proper planning and working capital management. A change in these Initial review might indicate that a company is healthy in terms of working capital when that is simply not the case. For example, you may notice that a corporation maintains a strong 2-to-1 current ratio (comparison between current assets and current liabilities) from year to year, while reporting...
Tn the summer of 1986 Bill Boeschenstein and the other top executives of OCF could finally heave a sigh of relief. OCF's net income for 1985 was 131.2 million on stock equity of 944.7 million. The ROE of 14 percent was the best the firm had done since 1979. The years 1980 to 1983 had been difficult years and only since 1984 had the company made a return to acceptable profit performance. Best yet, the forecast was that 1986's operating results would be better than those of 1985. Finally, the firm's top management could plan on spending to diversify out of the building-construction industry and to modernize the production facilities. For 1987 the capital budget could be as high as 300 million. The long-term debt was a modest 36 percent of the total capital. As a result of the recapitalization long-term debt increased from 543 million (at the end of 1985) to 1,645 million (at the end of 1986). Current liabilities went from 548 million to 1,310 million. On the other hand, stock equity...
Proceeds from issuance of long-term debt 3,480 Repayment of long-term debt (1,123) Finally, the last section of the statement lists the cash flows realized from financing activities. Issuance of securities will contribute positive cash flows, and redemption of outstanding securities will use up cash. For example, PepsiCo repaid 1,123 million of outstanding debt during 1999, which was a use of cash. However, it issued new long-term debt amounting to 3,480 million, which was a major source of cash. The 778 million it paid in dividends reduced net cash flow. Notice that although dividends paid are included in the cash flows from financing section, interest on debt is included with operating activities, presumably because unlike dividends, interest payments are not discretionary.
Handbook for Raising Capital. Homewood, IL Business One Irwin. Long, M. (1998). Raising Capital in the New Economy. San Diego, CA ProMotion Publishing. Nicholas, T. (1991). 43 Proven Ways to Raise Capital for Your Small Business. Wilmington, DE Enterprise Publishing. Tuller, L. (1994). The Complete Handbook of Raising Capital. New York, NY McGraw-Hill.
A long-horizon analysis treats bonds very differently, and assigns them a much more important role in the optimal portfolio. For long-term investors, money market investments are not riskless because they must be rolled over at uncertain future interest rates. Just as borrowers have come to appreciate that short-term debt carries a risk of having to refinance at high rates during a financial crisis, so long-term investors must appreciate that short-term investments carry the risk of having to reinvest at low real rates in the future. For long-term investors, an inflation-indexed long-term bond is actually less risky than cash. Such a bond does not have a stable market value in the short term, but it delivers a predictable stream of real income and thus supports a stable standard of living in the long term.
Let us examine the maturity selection problem from the viewpoint of the issuers of long-term debt. The construction of a manufacturing plant or warehouse or other physical facility can involve a large expenditure of funds for a corporation. These structures are long-lived assets. Corporations normally wish to pay for them over a long period of time. They can achieve this payment pattern by issuing long-term debt. Alternatively, they can issue short-term debt and keep reissuing it for a long period of time. If they issue the long-term debt, their costs are known ahead of time and there is no interest rate risk associated with the investment. This suggests that corporations will generally issue long-term debt to meet these types of obligations. Similar considerations apply to short-term debt. Corporations have a number of known short-term obligations that occur at fixed intervals tax payments and wages are two examples. Money is normally put aside to meet these obligations. If the...
When firms need to raise capital they may choose to sell (or float) new securities. These new issues of stocks, bonds, or other securities typically are marketed to the public by investment bankers in what is called the primary market. Purchase and sale of already-issued securities among private investors takes place in the secondary market.
Consider the performance of stocks typically considered by investors to be growth stocks. Since investors like these companies, we'll call growth stocks glamor. And we'll use the term value stocks to denote the companies that investors typically consider to be less desirable with minimal growth prospects. Investors consider growth companies to be firms with growing business operations. The average growth rate in sales for all companies over the past five years is a good measure of business growth. The 10 of companies with the
Business managers, lenders, and investors, quite rightly, focus on cashflows. Cash inflows and outflows are the heartbeat of every business. So, we'll start with cash flows. For our example we'll use a midsize company that has been operating many years. This established business makes a profit regularly and, equally important, it keeps in good financial condition. It has a good credit rating banks are willing to lend money to the company on very competitive terms. If the business needed more money for expansion, new investors would be willing to supply fresh capital to the business. None of this comes easy It takes good management to make profit, to raise capital, and to stay out of financial trouble. Exhibit A on the next page presents a summary of the company's cash inflows and outflows for its most recent year. Two different groups of cash flows are shown. First are the cash flows of making profit cash inflows from sales and cash outflows for expenses. Second are the other cash...
A private placement, which involves the selling of debt or equity to private investors, resembles both a public offering and a merger. A private placement differs little from a public offering aside from the fact that a private placement involves a firm selling stock or equity to private investors rather than to public investors. Also, a typical private placement deal is smaller than a public transaction. Despite these differences, the primary reason for a private placement - to raise capital - is fundamentally the same as a public offering. As mentioned previously, firms wishing to raise capital often discover that they are unable to go public for a number of reasons. The company may not be big enough the markets may not have an appetite for IPOs, the company may be too young or not ready to be a public company, or the company may simply prefer not to have its stock be publicly traded. Such firms with solidly growing businesses make excellent private placement candidates. Often,...
For record keeping and tax purposes, you must maintain a separate checking account for your real estate investment business that you can deposit checks into and pay expenses out of. One of the criteria that the IRS uses to determine whether a business is legitimate and not a sham is bank accounts. A business that claims expenses, losses, and depreciation on federal tax returns but does not maintain a bank checking account is going to be suspect and have a very hard time trying to document expenses if ever questioned or audited by the swell folks at the IRS. And the best method for documenting and recording expenses is to pay them with checks written on your real estate investment business checking account or with a credit card issued in the name of your real estate business. This way, you will not have to worry about confusing personal expenses with business expenses. Plus, working out of one checking account will allow you to easily track expenses on a daily basis. The same holds...
Hosts its five-minute forum monthly. Business owners present brief descriptions of venture opportunity for the purpose of helping raise capital. Focus is on new ventures seeking early-stage investors. Prescreened ventures present business plans that must conform to OVA guidelines. Contact Ohio Venture Association, 1120 Chester Ave., Suite 470, Cleveland, OH 44114. (216) 566-8884. Minnesota Seed Capital Network. Introduces private investors to high-tech, early-stage firms trying to raise capital in the 250,000 to 5,000,000 range. Entrepreneurs who present are prescreened by a steering committee that selects or rejects them. Committee includes investors, academics, executives,
Because of these two factors, currency markets are different from other traded markets. For instance, they are not really a capital market because the objective of trading currency is not to raise capital, but to create the ability to trade in stocks and bonds, which are real markets for raising capital. Currencies are pure trading markets, because they are truly a zero sum game. In the stock market, asset values will rise and fall with the economy. Interest rates also rise and fall, in an inverse relationship with the economy. Both relationships are remarkably stable. However, currencies have no stable relationship with the economy. As a pure trading market, currencies are more inclined to follow fads and fashions. In short, currencies follow crowd behavior in a way that is assumed for stock and bond markets.
Real Estate Investment Trusts (REITs) A REIT is similar to a closed-end fund. REITs invest in real estate or loans secured by real estate. Besides issuing shares, they raise capital by borrowing from banks and issuing bonds or mortgages. Most of them are highly leveraged, with a typical debt ratio of 70 .
In valuation, as in much of corporate finance, we assume that a firm with good investments has access to capital markets and can raise the funds it needs to meet its financing and investment needs. Thus, firms with great growth potential will never be forced out of business because they will be able to raise capital (more likely equity than debt) to keep going. In buoyant and developed financial markets, this assumption is not outlandish. Consider, for instance, the ease with which new economy companies with negative earnings and few if any assets were able to raise new equity in the late 1990s. However, even in a market as open and accessible as the United States, access to capital dried up as investors drew back in 2000 and 2001. In summary, then, we may have been able to get away with the assumption that firms with valuable assets will not be forced
Capital is usually different and is used by corporations to judge operations. To further complicate matters, capital is not the same as capitalization, so corporate return calculations can be difficult to compare. Return on capital normally means capital stock. Capitalization is the total funding of an organization, including stock and long-term debt.
From the balance sheet, we find that ConEd has 5501 million of outstanding long-term debt. If we want a detailed description of a company's capital structure, we can access online its regulatory filings at the SEC. We examine Note B of ConEd's 10K for 2001 filed with the SEC through its EDGAR service. We see that ConEd has 25 different taxable debentures aggregating 4.105 billion with maturities from 2002 to 2041 and interest rates ranging from 6.375 percent to 8.125 percent. ConEd also is the obligor in 1.191 billion of tax-exempt debt that was issued on ConEd's behalf by the New York State Energy Research and Development Authority. The 13 tax-exempt issues have maturities from 2014 to 2036 and interest rates ranging from 1.81 percent to 7.5 percent. ConEd also has at least four series of preferred stock outstanding with an aggregate face value of 269.6 million. Is ConEd's capital structure confusing enough
Indonesia, however, looks somewhat different. While it is true that as the other countries in the area, it is exhibiting banking fragilities30 and short-term debt sharply exceeds available foreign exchange reserves,31 the current account deficit is not deteriorating as fast32 the slowdown in growth is not yet evident, and the real exchange rate does not appreciate as much as in the other countries in the region. In fact, only very few indicators are showing signs of anomalous behavior in the months prior to the crisis,33 with the probabilities of
Entrepreneurs in need of capital need this book. This book is about initiating the process of raising capital for companies at earlier stages of development and for whom traditional financing resources are not available. For the entrepreneur who has failed at these traditional sources of financing, Angel Capital offers a step-by-step formula for reaching the highly secretive and selective market of the private investor, a segment of the investor market that has become a major source of funding for entrepreneurial ventures. Entrepreneurs include those people raising capital on their own, CEOs of ongoing businesses looking for nontraditional financing, and owners of small businesses failing to qualify for loans from traditional sources and seeking expansion capital to grow their businesses. This category also includes owners of financially troubled companies who seek capital to reorganize and inventors who desire capital to commercialize their technologies. Furthermore, the...
What is investment banking Is it investing Is it banking Really, it is neither. Investment banking, or I-banking, as it is often called, is the term used to describe the business of raising capital for companies and advising them on financing and merger alternatives. Capital essentially means money. Companies need cash in order to grow and expand their businesses investment banks sell securities to public investors in order to raise this cash. These securities can come in the form of stocks or bonds, which we will discuss in depth later.
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