Corporate Finance& RiskManagement 01 Overview€¦ · Intangible Assets 32.2 Shareholders' equity...

Ernst Maug

University of Mannheim

http://cf.bwl.uni-mannheim.de

[email protected]

Tel: +49 (621) 181-1952

Corporate Finance & Risk Management

01 Overview

© 2016 Ernst Maug Corporate Finance & Risk Management: Overview 2

Questions

� How do corporations fund their operations?

� Is corporate finance in Europe different from the US or Japan?

� What is the role of financial institutions?


Financial Markets

Primary

Markets

Secondary

Markets

OTC

Markets

Money


Financial Institutions (1)

Company

IntermediariesBanks

Insurance Cos.

Brokerage Firms

ObligationsFunds

$ € ¥


Financial Institutions (2)

Intermediaries

InvestorsDepositors

Policyholders

Investors

ObligationsFunds

$ € ¥


Sources and uses of funds

� Sources of funds…

= operating cash flow

+ proceeds from equity issues

+ proceeds from debt issues

(+ proceeds from issues of other securities)

� …always equal the uses of funds

= capital expenditure (in PPE)

+ investment in working capital

+ dividend payments

+ interest payments

(+ payments to holders of other securities)

+ increase (- decrease) in cash position


Example: Sources and uses of funds

Volkswagen AG in € million

Operating cash flow 12,595

Proceeds from equity issues 3,067

Proceeds from bond issues 22,118

Proceeds from other securities 285

Sources of funds 38,065

Capital expenditure (PPE & working capital) 16,890

Dividend payments 1,849

Interest payments 14,614

Payments to other securities 35

Uses of funds 33,388

Difference 4,677

Effects of exchange rate changes on cash -462

Change in firms cash position 4,215

Source: Volkswagen AG Annual Report 2013

© 2016 Ernst Maug Corporate Finance & Risk Management: Overview

Patterns of Corporate Financing (1)Sources of funds for US nonfinancial corporations

-100%

-50%

0%

50%

100%

Internal funds Net equity issues Net borrowing

Source: Brealey/Myers/Allen (2011), Fig. 14.1


Patterns of Corporate Financing (2)Sources of funds for German nonfinancial corporations

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

in %

Sources of Funds for German Nonfinancial Corporations

Internal Funds Net Equity Issues Debt Instruments

Source: Deutsche Bundesbank (2013)


Book value balance sheet

Aggregate Balance Sheet for German Corporations* in 2011€ Billions € Billions

Intangible Assets 32.2 Shareholders' equity 595.7

Tangible Assets 460.8

Inventory 373.8 Current Liabilities 825.5

Fixed Assets 866.8

Long-term Debt 136.3

Cash 124.9 Other long-term Liabilities 122.6

Reicevables 709.0 Total long-term Liabilities 258.9

current 663.8

non-current 45.3 Accrued Liabilities 420.7

Investments among: Pensions Provisions for Pensions 138.1

current assets 28.8

Current Assets 862.7 Accruals and Deferrals 11.2

Other long-term assets 374.0

Accruals and Deferrals 8.6

Total Assets 2,112 2,112

* Manufacturing sector (including minig industry, construction industry, trade and transport)

Source: Deutsche Bundesbank (2013).

Total liabilities and stockholders' equity


Long-term debt

�Long-term debt: commonly debt with maturity > 1 year

LT debt

LT debt + equity =

136.3

136.3 + 595.7= 0.186

LT liabilities

LT liabilities + equity =

258.9

258.9 + 595.7= 0.303

LT liabilities

Total assets =

258.9

2,112=0.123


Debt Ratio in EuropeBook values vs. market values

Average Market and Book Debt Ratio*

of European Nonfinancial Companies

0

0.1

0.2

0.3

0.4

0.5

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Book Debt Ratio Market Debt Ratio

*Market (book) debt ratio is total debt over total debt plus market (book) value of equity.

Source: Worldscope Data


Cross-Country Debt Ratios

0

10

20

30

40

50

60

70

80

Ital

y

Jap

an (

2005

)

Ger

man

y

Fra

nce

Sp

ain

Po

rtu

gal

Au

stri

a

U.S

.A (

2005

)

Fin

lan

d (

2005

)

Bel

giu

m

Net

her

lan

ds

Deb

t R

atio

(%

)

Source: Brealey/Myers/Allen (2011), Fig. 14.3


Stockholder’s EquityAn Example: SAP AG

Book Value of Common Stockholders' Equity of SAP AG, 2013

(in € million)

Common shares (nominal value 1€ per share) 1,229 €

Additional paid-in capital 551 €

Retained earnings 16,258 €

Treasury Shares 1,280 €-

Other adjustments 718 €-

Net common equity 16,040 €

Note:

Authorized shares (in millions) 1,479

Issued shares, of which: 1,229

Outstanding shares 1,194

Treasury shares 35

Source: SAP AG Annual Report 2013


Market value vs. book value of shares

� Book value of shares:

- 1,194 million shares outstanding

- Total shareholders‘ equity: €16,040 million

- Book value per share as of Dec 31, 2013:

€16,040

1,194= €13.43

� Market value of shares:

- 1,194 million shares outstanding

- Market value per share as of Dec 31, 2013: €62.31

- Market capitalization: €74,398 million

- Ratio of market value to book value: 74,398/16,040 = 4.64


Ownership structureSAP AG, Dec 31, 2013

Dietmar Hopp 65,233,575 5.3%

Hasso Plattner 119,287,761 9.7%

Klaus Tschira 92,137,817 7.5%

Treasury shares 34,398,118 2.8%

Free float 917,692,661 74.7%

1,228,504,232 100.0%

Source: SAP AG Annual Report 2013


Ownership Structure of European Shares

17

Source: European Savings Institute, Final Report to the European Commission, p. 20


Ownership Structure of German Shares

18

Source: European Savings Institute, Final Report to the European Commission, p. 43


Ownership and control – dual class shares

� Issue two classes of shares:

� 1st class: „A-shares“, common stock (Stammaktie)

- voting rights

- dividend rights

� 2nd class: „B-shares“, preferred stock (Vorzugsaktie)

- same/superior dividend rights

- no voting rights


Ownership and control - Pyramids

Company A

Company B

70% ownership by company A

� A‘s management dominates B

Company C

70% ownership by company B� B‘s management dominates C

� A‘s management dominates C..although it owns only 49%!


Dual-Class Shares

Number of Dual-Class Firms

0

10

20

30

40

50

60

70

Germ

any

Italy

Sweden

Switzer

land

Denmar

k UKFinl

and

Norway

Austri

aFra

nce

Luxe

mbo

urg

Turke

y

Source: Nenova (2003)


The value of a vote

Country

Sample

period

Firms in

sample

Voting

premium Source

USA 1940-1978 26 5.4% Lease, McConnell & Mikkelson (1983)

Canada 1981-1992 98 10.4% Smith & Amaoko-Adu (1995)

USA 1984-1990 94 10.5% Zingales (1995)

UK 1955-1982 152 13.3% Megginson (1990)

Sweden 1980-1990 65 15.2% Bergström & Rydqvist (1992)

Germany 1956-1998 101 17.2% Daske & Ehrhardt (2002), Dittmann (2005)

Switzerland 1990-1991 29 18.0% Kunz & Angel (1996)

Switzerland 1973-1983 45 22.4% Horner (1988)

Germany 1988-1997 84 26.3% Hoffman-Burchardi (1999), Dittmann (2005)

Israel 1981 25 45.5% Levy (1982)

Italy 1987-1990 96 81.5% Zingales (1994)Source: Dittmann (2005)


Corporate Bonds

� Secured Bonds (Asset-Backed)

- Secured by real property

- Ownership of the property reverts to the bondholders upon default.

� Debentures

- General creditors

- Have priority over stockholders, but are subordinated to secured

debt.


Features of corporate bonds

� Corporate bonds are complex and come with many bells and

whistles:

- Senior versus subordinated bonds: pecking order in case of bankruptcy

- Convertible bonds: exchange bond into shares

- Callable bonds: issuer can redeem bond early

- Putable bonds: investor can sell bond back to the issuer

- Sinking funds: Issuers sets aside funds to repay bond before maturity

- …and more


Bond Ratings

Moody's S&P Quality of Issue

Aaa AAA Highest quality. Very small risk of default.

Aa AA High quality. Small risk of default.

A A High-Medium quality. Strong attributes, but potentially vulnerable.

Baa BBB Medium quality. Currently adequate, but potentially unreliable.

Ba BB Some speculative element. Long-run prospects questionable.

B B Able to pay currently, but at risk of default in the future.

Caa CCC Poor quality. Clear danger of default .

Ca CC High specullative quality. May be in default.

C C Lowest rated. Poor prospects of repayment.

D - In default.


Ratings and spreads

Source: • Yield spread (1year bond): Reuters Corporate Spreads for Industrials (28/03/2014) • Probability of default: S&P 2013 Annual Global Corporate Default Study And Rating Transitions.

0

1

2

3

4

5

6

7

0

5

10

15

20

25

AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC/C

Default rate - Average

Spread - 1yr

Pro

babi

lity

of d

efau

lt (%

)

Yie

ld s

prea

d (%

)


Funding requirements

Issue debt Finance internally Issue equity

Bonds Bank debt Voting Non-voting

Security Maturity Other features

SummaryThe financial manager‘s decision problem (highly simplified)

Corporate Finance& RiskManagement 01 Overview€¦ · Intangible Assets 32.2 Shareholders' equity...

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