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What is commercial paper?
Alternative to bank financing, issued by corporations and due in a short period.
What is the riskiest type of investment?
Warrants or options
What is a nonmonetary default?
When a company breaks the covenants surrounding debt (such as a covenant not to take out more debt)
What case held that "deepening insolvency" was actionable?
What was the holding of Trenwick?
Deepening insolvency is not actionable.
Between Trenwick and Lafferty, which is more followed?
What was the holding of Fin Hay?
Courts will look at many factors to differentiate between "real debt" and equity disguised as debt.
What case described the instrumentality doctrine?
What was the holding of Eliasen?
There is no obligation to debt holders outside of what is contracted for.
When do companies buy back stock?
When they think their stock is undervalued.
What are the factors Milken says should be considered when deciding on capital structure?
- State of capital markets
- Industry Dynamics
- Company and management team
- Social trends
- Government Regulation
What are some factors that Fett considers in deciding if something is really debt?
- Intent of parties
- Whether there is a fixed interest rate and maturity
- Source of interest payments
What was the holding of Pathe Communications?
Businesses owe good faith and fair dealing on contracts with creditors
What happens to interest prices when bond prices go up?
Interest prices go down
How do you value a stream on interest payments on a bond?
Multiply the coupon rate by the principal, and then use the annuity table on the result.
When converting EBIT to revenue, which is calculated first, interest or taxes?
Interest. Taxes are calculated after interest is deducted.
What is a common mistake companies make when financing assets?
Not matching the length of the financing with the life of the asset.
How could you get financing with accounts receivable and which option is better?
- 1. Getting a loan backed by AR
- 2. Factoring
- Geting a loan is better because of lower cost of borrowing
What maneuver did Marv Lipton invent?
The poison pill
What is the purpose of a poison pill?
To slow down an acquisition to negotiate a better price.
What is equitable subordination?
When courts examine the money controllers put into a corporation to determine if it is true debt or disguised equity. Lenders care because they don't want other competing claims.
What are two ways to deal with financial distress other than banktruptcy?
- Swapping debt for equity
- Swapping debt for debt
What is the effect of a debt for equity swap on share price?
Share price may decline because shares are diluted, but may increase because company is more financially stable
What duty does a board of directors owe to shareholders?
Fiduciary duty of care and loyalty.
What duty does a board of directors owe to bond holders?
Contractual duties only unless company is in zone of insolvency. If in zone of insolvency, fiduciary duty is owed.
How many majors has Tiger Woods won?
What is Tiger Woods' real name?
Eldrick Tont Woods
What are preemptive rights?
A shareholder's right of first refusal on new stock issued by a company he owns shares in to prevent dilution of his stock and voting power.
Where are pre-emptive rights used today?
In venture capital.
What does Stokes v. Continental trust stand for?
Preemptive rights are inherent to stock ownership
What does Katzowitz v. Sidler stand for?
Preemptive rights don't protect shareholders in closely held companies, so courts will prevent the issue of new shares below market price without a good business reason.
What did the securities act of 1933 do?
Required registration of IPOs and set rules for disclosure.
What did the securities exchange act of 1934 do?
Mandated financial reporting from publicly traded companies.
What protections do bondholders have if interest rates decline?
Call protection to prevent companies from calling bonds and refinancing covenants to prevent refinancing. Both work for a limited time.
What is a sinking fund?
A fund where part of the principle of a bond is bought back during, enabling lower rates and, if interest rates increase, retiring debt at a discount.
How are banks now acting like the bond market?
Trading debt rather than holding it
What is current yield and what is the formula?
What rate a bond would yield in the first year if you bought it now. The formula is annual interest payment divided by closing price.
What is yield to maturity?
What a bond would yield over the life of the obligation
What indenture provision was added after RJR Nabisco?
Change of control covenants
What is a maintenance covenant and who uses it?
A covenant that must be complied with constantly. Banks use it.
What is an incurrence covenant and who uses it?
A covenant that must only be complied with when new debt is taken out. Bondholders use it.
What is the holding in Nabisco?
Courts will not read in an implied change of control provision. Corporations have no duty to insure investors made a good investment.
When does double declining balance depreciation switch to straight line?
In the last three years
If the discount rate of a bond is the same as its coupon rate, what will the value of the bond be?
What kind of fund would buy bonds with very high interest rates?
What is cross default?
Covenant that defaulting on one bond will create defaults on others.
Name three types of covenants
- Balance Sheet
Give an example of a marketplace covenant
Call protection or refinancing covenants
Give an example of an operations covenant
- Ebitda/interest expense ratio
- Minimum net worth
Give an example of a balance sheet covenant
- Debt/equity ratio
- Senior debt/total debt ratio
What is a money term?
Term of an indenture that requires unanimous consent to amend
Name the three money terms
- Interest payment
- Sinking fund payment
What duties do boards owe to convertible security holders?
Contractual duties only
What is a conversion premium?
The premium you pay over market price for convertible stock
How is conversion price for convertible stock set?
In the contract when the stock is sold.
A warrant can be attached to a convertible bond. What is the difference between a synthetic and non-synthetic warrant?
Synthetic warrants may optionally be paid for from the bond, non-synthetic warrants must be paid from outside cash.
What happens to holders of convertible security on a merger?
The holder has the right to receive the securities he would have received if he had converted before the merger.
What is a type of company that tends not to pay dividends?
What does it mean if a company stops paying dividends?
The company is distressed
What started the LBO craze?
What are three test for determining if a lease is a capital lease? How many must be met?
- Lease transfers ownership before lease expires
- Lessee can purchase asset at end of lease for a bargain price
- Lease lasts for over 75% the useful life of the asset
- Only one term need be met
What is goodwill?
The purchase price paid for a company in excess of its book value
What do cash flow/operations covenants protect against?
Deterioration in the operation of the company.
What do balance sheet covenants protect against?
Excessive debt "crudding up" the balance sheet.
If a bond is bought at less than par value, which will be higher between current yield and yield to maturity?
Yield to maturity.
What are two advantages preferred stock has over common?
- Guaranteed dividends
What is sham preferred stock?
Preferred stock with no real preference over common stock.
What is cumulative prefered stock?
Stock where past dividends must be paid out before dividends on common stock can be paid.
What are the old and new methods of shareholder protection?
- Old: Minimum capital requirements
- New: Disclosure
Why would a company issue preferred stock rather than debt?
What was the holding of Guttman v. Illinois Central RR? What happened afterward?
Preferred stock dividend extinguishes at the end of the year. Afterward all preferred stock was cumulative.
What is perpetual preferred stock?
Preferred stock without a maturity date
What is an exchangeable bond?
A bond exchangeable for a bond of another company
What is the holding of Simons v. Cogan?
There are no fiduciary duties to convertible debt holders
What is ratcheting?
When a company issues convertible securities at one conversion price, then again at a lower one. If you hold the old stock, you get to step down your conversion price.
Name three ways corporations provide value for shareholders
- Cash dividends
- Stock Buyback