1、Ch.16-1:Term Loans and LeasesTerm LoansCharacteristics of Term Loans Secured loans 1-to 10-year maturity Repaid in periodic installmentsTerm LoansCollateral for shorter loans Chattel mortgage(mortgage on machinery and equipment)Collateral for longer loans mortgages on real estateTerm LoansRestrictiv
2、e Covenants on Borrowers Working capital-borrower may be required to set a minimum current ratio.Restrictions on additional borrowing.Borrower provides periodic financial statements.Restrictions on management changes.Term LoansEurodollar Loans Loans by major international banks based on foreign depo
3、sits denominated in dollars.Adjustable interest rates based on the London Interbank Offered Rate(LIBOR).LeasesLessee Acquires the services of a leased asset,by making a series of payments to the owner of the asset.Lessor The owner of the asset that is being leased to the lessee.LeasingTypes of Lease
4、s Direct Lease-a firm acquires the services of an asset that it didnt previously own.Sale and Leaseback-Assets owner sells the asset to a buyer,and then leases the asset from the buyer.Leveraged Lease-Lessor borrows from a lender to buy the asset that will be leased to the lessee.Lease vs.PurchaseIs
5、sue:Should a firm Purchase an asset using the firms optional financing mix,or Finance the asset using a financial lease.Lease vs.PurchaseProcedure:1)Compute NPV to determine if the asset should be purchased.Lease vs.PurchaseProcedure:1)Compute NPV to determine if the asset should be purchased.NPV =-
6、IO ACFt(1+k)t nt=1S SLease vs.PurchaseProcedure:2)Compute NAL(net advantage to leasing)to determine leasing the asset is better for the firm than purchasing.O=operating cash flows if purchasedR=annual rental cost T=marginal tax rateI=interest expense forfeited if leasedD=depreciation expense Vn=afte
7、r-tax salvage valuek=discount rate IO=purchase pricerb=after-tax interest rate on borrowed funds.Leasing vs.Debt Financing:Potential Benefits1)Flexibility and Convenience Leases are easier,quicker and require less documentation.Leases are easier to have approved than capital budgeting projects.Leasi
8、ng simplifies bookkeeping for tax purposes.Leasing allows synchronization of lease payments with the firms cash cycle.Leasing avoids the problems of ownership.Leasing vs.Debt Financing:Potential Benefits2)Lack of RestrictionsLeases usually do not have protective restrictions.3)Avoiding Risk of Obsol
9、escence?Not really-only in cancelable operating leases.4)Conservation of Working CapitalLeases usually have a lower initial outlay than a purchase.Leasing vs.Debt Financing:Potential Benefits5)100%Financing?Leases usually do not require a down payment.6)Tax SavingsLeases may provide a larger tax shi
10、eld than that provided by depreciation.7)Ease of Obtaining CreditIt is often easier for riskier firms to obtain a lease than to obtain debt financing.Ch.16-2:Corporate Restructuring:Combinations and DivestituresCorporate Restructuring1960s-Mergers of unrelated firms formed huge conglomerates.1980s-I
11、nvestors purchased conglomerates and sold off the pieces as independent companies.1990s-Strategic mergers of related firms to create synergies.Possible Benefits of Mergers Economies of Scaleex:reduce administrative expenses as a percentage of sales.Tax Benefitsex:target firm has tax credits from ope
12、rating losses,and lacks the income to use the credits.Unused Debt Potentialex:merging with a firm that has little debt increases debt capacity.Possible Benefits of Mergers Complementarity in Financial Slackex:a cash-poor firm merging with a cash-rich firm will be able to accept more positive NPV pro
13、jects.Removal of Ineffective Managersex:ineffective target firm managers may be replaced,increasing the value of the target firm.Possible Benefits of Mergers Increased Market Powerex:merging may increase monopoly power,but too much may be illegal.Reduction in Bankruptcy Costsex:merger may improve fi
14、nancial condition of the combined firm,reducing direct and indirect costs of financial distress.Determination of Firm Value1)Book value:assets minus liabilities on the balance sheet.Book value is based on historical cost minus accumulated depreciation.2)Appraisal value:firm value is estimated by an
15、independent appraiser.This estimate is often based on the firms replacement cost.Determination of Firm Value3)Chop-shop or Break-up value:determines if multi-industry firms would be worth more if separated into their parts.Firms are valued by their business segments.Determination of Firm Value4)Free
16、 Cash Flow or“Going Concern”value steps:Estimate the target firms free cash flows.Estimate the target firms after-tax risk-adjusted discount rate.Calculate the present value of the target firms free cash flows.Estimate the initial outflow of the acquisition.Calculate the NPV of the acquisition.Dives
17、tituresDivestiture-Eliminating a division or subsidiary that does not fit strategically with the rest of the company.Divestitures Sell-off:selling a firms subsidiary or division to another company.Spin-off:separating a subsidiary from its parent company,with no change in equity ownership.The parent
18、firm no longer has control over the subsidiary.Divestitures Liquidation:Selling assets to another company and distributing the proceeds from the sale to shareholders.Going Private:A group of private investors buys all of a firms publicly-traded stock.The firm is now private,and its shares are no longer traded in the secondary market.
