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1、20 - 1nPreferred stocknLeasingnWarrantsnConvertiblesnRecent innovationsCHAPTER 20Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles20 - 2LeasingnLeasing is sometimes referred to as “off balance sheet” financing if a lease is not “capitalized.” In other words, it is not shown on t
2、he balance sheet. nLeasing is a substitute for debt financing and, thus, uses up a firms debt capacity.(More.)20 - 3nCapital leases are different from operating leases:lCapital leases do not provide for maintenance service.lCapital leases are not cancelable.lCapital leases are fully amortized.20 - 4
3、Analysis: Lease vs. Borrow-and-BuyData:nNew machine costs $1,200,000.n3-year MACRS class life; 4-year economic life.nTax rate of 40%.nkd = 10%.(More.)20 - 5nMaintenance of $25,000/year, payable at beginning of each year.nResidual value in Year 4 of $125,000.n4-year lease includes maintenance.nLease
4、payment is $340,000/year, payable at beginning of each year.20 - 6Depreciation ScheduleDepreciable basis = $1,200,000MACRS Depreciation End-of-YearYear Rate ExpenseBook Value 1 0.33 $ 396,000 $804,000 2 0.45 540,000 264,000 3 0.15 180,000 84,000 4 0.07 84,000 0 1.00 $1,200,00020 - 7In a lease analys
5、is, what discount rate should cash flows be discounted at?Since cash flows in a lease analysis are evaluated on an after-tax basis, we should use the after-tax cost of borrowing. Previously, we were told the cost of debt, kd, was 10%. Therefore, we should discount cash flows at 6%.A-T kd = 10%(1 T)
6、= 10%(1 0.4) = 6%.20 - 8Cost of Owning Analysis(In Thousands)Cost of asset(1,200.0)Dep. tax savings1 158.4 216.0 72.0 33.6Maint. (AT)2 (15.0) (15.0) (15.0) (15.0)Res. value (AT)3 _ _ _ _ 75.0 Net cash flow(1,215.0) 143.4 201.0 57.0108.6PV cost of owning ( 6%) = -$766,948.01234(More.)20 - 9Notes:1Dep
7、reciation is a tax deductible expense, so it produces a tax savings of T(Depreciation). Year 1 = 0.4($396) = $158.4.2Each maintenance payment of $25 is deductible so the after-tax cost of the lease is (1 T)($25) = $15.3The ending book value is $0 so the full $125 salvage (residual) value is taxed.20
8、 - 10Cost of Leasing Analysis(In Thousands)Lease pmt (AT)1 -204 -204 -204 -204PV cost of leasing ( 6%) = -$749,294.Note:1Each lease payment of $340 is deductible, so the after-tax cost of the lease is (1 T)($340) = -$204.0123420 - 11Net Advantage of LeasingNAL= = $766,948 $749,294= $17,654.PV cost o
9、f owningPV cost of leasingSince the cost of owning outweighs the cost of leasing, the firm should lease.20 - 12Suppose computers residual value could be as low as $0 or as high as $250,000, but expected value is $125,000. How could the riskiness of the SV be incorporated in the analysis? What effect
10、 would this have on lease decision?To account for risk, the rate used to discount the SV would be increased; therefore, the cost of owning would be even higher. Leasing becomes even more attractive.20 - 13What effect would a cancellation clause have on the riskiness of the lease?A cancellation claus
11、e lowers the risk of the lease to the lessee, but increases the risk to the lessor.20 - 14nPreferred dividends are fixed, but they may be omitted without placing the firm in default.nMost preferred stocks prohibit the firm from paying common dividends when the preferred is in arrears.nUsually cumula
12、tive up to a limit.How does preferred stock differ fromcommon equity and debt?20 - 15nDividends are indexed to the rate on treasury securities instead of being fixed.nExcellent S-T corporate investment:lOnly 30% of dividends are taxable to corporations.lThe floating rate generally keeps issue tradin
13、g near par.What is floating rate preferred?20 - 16nHowever, if the issuer is risky, the floating rate preferred stock may have too much price instability for the liquid asset portfolios of many corporate investors.20 - 17nA warrant is a long-term call option.nA convertible consists of a fixed rate b
14、ond plus a call option.How can a knowledge of call options help one understand warrants and convertibles?20 - 18nP0 = $10.nkd of 20-year annual payment bond without warrants = 12%.n50 warrants with an exercise price of $12.50 each are attached to bond.nEach warrants value will be $1.50.Given the fol
15、lowing facts, what coupon rate must be set on a bond with warrants if the total package is to sell for $1,000?20 - 19Step 1: Calculate VBondVPackage = VBond + VWarrants = $1,000.VWarrants = 50($1.50) = $75.VBond + $75= $1,000 VBond= $925.20 - 20Step 2: Find Coupon Payment and RateNI/YRPVPMTFV20 12 -
16、925 1000Solution: 110Therefore, the required coupon rate is $110/$1,000 = 11%.20 - 21nThe package would actually have been worthVpackage = $925 + 50($2.50) = $1,050, which is $50 more than the actual selling price.If after issue the warrants immediately sell for $2.50 each, what would this imply about the value of the package?20 - 22nThe firm could have set lower interest payments whose PV would be smaller by $50 per bond, or it could have offered fewer warrants with a higher exercise price.nCur
