An Introduction to Corporate Finance

<p>About the author xv</p>
<p>1 BEHIND THE CHINESE WALL 1</p>
<p>Corporate finance in investment banking 2</p>
<p>Chinese walls 3</p>
<p>Corporate finance assignments 5</p>
<p>Flotations/IPOs 6</p>
<p>Mergers, acquisitions and divestitures 8</p>
<p>Leveraged buyouts and management buyouts 13</p>
<p>Financial advice 13</p>
<p>Careers in corporate finance 15</p>
<p>Organisation of this book 20</p>
<p>Part I CORPORATE FINANCE TRANSACTIONS 23</p>
<p>2 SOURCES OF CAPITAL 25</p>
<p>Debt securities 27</p>
<p>Money market securities 27</p>
<p>Long–term debt 29</p>
<p>Floating rate notes 31</p>
<p>Equity 32</p>
<p>Preference shares 32</p>
<p>Ordinary shares 34</p>
<p>Hybrids (convertible securities) 36</p>
<p>3 FLOTATIONS/INITIAL PUBLIC OFFERINGS 39</p>
<p>Primary offerings 40</p>
<p>Ancillary benefits of flotation 46</p>
<p>Disadvantages of flotation 46</p>
<p>Methods of flotation 47</p>
<p>Suitability for listing 49</p>
<p>The offering process 52</p>
<p>Participants and roles 52</p>
<p>Documentation and regulation 55</p>
<p>Due diligence and verification 57</p>
<p>Marketing, syndication and pricing 59</p>
<p>Underwriting 62</p>
<p>4 INTERNATIONAL EQUITY OFFERINGS 65</p>
<p>Rationale for international offerings 66</p>
<p>International investors 68</p>
<p>Development of international equity offerings 69</p>
<p>Regulation and documentation 70</p>
<p>Depository receipts 73</p>
<p>Marketing, syndication and distribution 75</p>
<p>Offer structure 76</p>
<p>Price setting, underwriting and bookbuilding 77</p>
<p>Fees and commissions 79</p>
<p>After the new issue 81</p>
<p>Stabilisation 81</p>
<p>5 RIGHTS ISSUES/SECONDARY OFFERINGS 83</p>
<p>Pre–emption rights 85</p>
<p>Setting the price 87</p>
<p>Calculating the theoretical rights price 88</p>
<p>Rights issue timetable 90</p>
<p>Fees and commissions 90</p>
<p>Secondary offerings 94</p>
<p>Marketed offerings 95</p>
<p>Bought deals 96</p>
<p>Accelerated bookbuilding 98</p>
<p>Demergers 100</p>
<p>6 MERGERS AND ACQUISITIONS 101</p>
<p>Rationale for M&amp;A 102</p>
<p>Types of merger 104</p>
<p>Merger waves 106</p>
<p>Financing the transaction 107</p>
<p>Bootstrap transactions 109</p>
<p>Regulation of M&amp;As 110</p>
<p>Key elements of the City Code 111</p>
<p>7 MANAGEMENT BUYOUTS 115</p>
<p>Financial structure 118</p>
<p>Bank finance (secured lending) 120</p>
<p>Private equity funds 122</p>
<p>Mezzanine finance 123</p>
<p>High–yield bonds 124</p>
<p>Part II CORPORATE FINANCE TECHNIQUES 127</p>
<p>8 VALUING SECURITIES 129</p>
<p>Valuing bonds 130</p>
<p>Valuing shares and companies 132</p>
<p>Cash flow based valuations 135</p>
<p>Determination of terminal/residual value 139</p>
<p>Determining the discount rate 143</p>
<p>Determining the value of the business 143</p>
<p>Relative valuations 146</p>
<p>Price earnings ratio 148</p>
<p>Price/EBIT multiple 149</p>
<p>Market to book value 149</p>
<p>Dividend yield 150</p>
<p>Enterprise value to EBITDA 151</p>
<p>Determining the value of a business based on ratios/multiples 152</p>
<p>9 DETERMINING THE COST OF CAPITAL 159</p>
<p>Weighted average cost of capital 160</p>
<p>Use market values 161</p>
<p>Use target/optimal weighting 162</p>
<p>After tax 163</p>
<p>Match nominal rates with nominal cash flows 163</p>
<p>Cost of debt: Kd 165</p>
<p>Cost of equity: Ke 166</p>
<p>Capital asset pricing model 168</p>
<p>Risk–free rate 170</p>
<p>Market risk premium (equity risk premium) 170</p>
<p>Beta ( ) 171</p>
<p>Health warning 172</p>
<p>10 SHAREHOLDER VALUE ADDED (ECONOMIC PROFIT) 173</p>
<p>Just another number? 174</p>
<p>Benefits of SVA 175</p>
<p>Calculation of SVA 177</p>
<p>Limitations of economic profit calculations 181</p>
<p>Appendix: UK CORPORATE VALUATION METHODS: A SURVEY 183</p>
<p>Scoring and tables 184</p>
<p>A.1 Valuation methodology 185</p>
<p>A.1.1 Frequency of use 186</p>
<p>A.1.2 Calculation of final valuation or value range 188</p>
<p>A.2 Discounted cash flows 189</p>
<p>A.2.1 DCF approaches 189</p>
<p>A.2.2 Forecast period 190</p>
<p>A.2.3 Terminal value 191</p>
<p>A.3 Cost of capital 192</p>
<p>A.3.1 Determining the cost of equity 192</p>
<p>A.3.2 Capital asset pricing model 193</p>
<p>Sources of information 197</p>
<p>Glossary 199</p>
<p>List of abbreviations 211</p>
<p>Additional reading 213</p>
<p>Index 215</p>