Lecture 4 Flashcards
(17 cards)
What is a balance sheet of a firm?
Snapshot of financial assets and liabilities
Shareholder’s equity is a … and has … ?
Financing tool (common shares) & residual claim on the firm’s FCF
What does debt has priority claim mean?
Debt gets paid before equity
Too much debt or too much equity can lead to?
Agency problems
How do conflicts of interest arise?
- Disagree on investment projects and risk-taking
- Disagree on project financing
- Disagree on dividend policy
What can poor governance quality lead to?
Negatively affecting both shareholders and creditors
What is the difference between individual investors and institutional investors?
Individual -> small stakes & high turnover
Institutional -> high stakes & longer holding period
What are dual-class shares?
Company offering at least two classes of stock
- One with limited voting power
- One with more voting power
What are the supporting arguments for dual-class shares?
- Strong leadership and pursue long-term interests of the firm
- Prevent hostile takeovers
What are the opposing arguments for dual-class shares?
- Concentrated control rights
- Unequal power between managers and shareholders
What does stewardship role mean?
Responsible for client’s money to create long-term value and has legal and ethical obligations towards investor.
What is shareholder activism?
Shareholder who uses his equity stake to bring change within the company
What is proxy voting?
Let’s shareholders influence company decisions
What are the different forms of debt finance?
- Bank loans
- Corporate bond
How would seniority of a bond affect its value?
The higher the seniority, more likely to repaid on time, the higher value of the bond
How could a borrower reduce its cost of debt?
- Provide collaterals
- Credit guarantees
- Credit rating
- Debt covenants
Explain the different forms of hybrids
- Convertible bond: can turn into shares
- Preferred shares: fixed dividend
- Option-linked bonds: cash flow tied to index
