29 октября 2026 г.: transcript

So, welcome to lesson seven of corporate finance. Uh, we're going to be covering today. We're going to be covering today um the sources of capital. We were talking about that we need in order to grow to expand our business, we need to um and in in order to expand our business, we need to grow. In order to be sustainable, we need to grow. So at this particular point, we want to know where we know exactly what capital investments are we're going to do. Are we going to buy a plant? Are we going to buy an equipment? Are we going to buy a building? Where are we going to buy? At this point, we are very clear. Let's say that we know that we want to buy an office building. Okay, we're very clear about that. That's what we want to do and what we need for expansion. we need to uh hire more people or we think that

from the financial perspective it's a great business because the real estate that there is a very nice real estate opportunity and we can find lower prices per square feet. So at this point let's say that we're very clear about the asset that we want to buy. So the question is how are we going to buy it? Okay, we can buy it through cash. You can we can buy it through cash which is not a very well source of um a very well source of um of purchasing. Usually businesses they do financing. Okay. And they pay it with this cash flows that they um that they generate uh period over period. So we have equity or debt finances. Like we said we have three types. We can pay it with our own money through retained earnings. Whatever we have saved in there, we reinvested in

the business. That's something fair. We can do it. That's part of the plan. That's fine. I'm not saying it's bad. I'm saying that it's not what's customary. Okay? But you can finance through equity or debt financing in case that you want to finance. So, let's see how are we going to see that. So we have we're going to see from the equity and um the debt we're going to see the introduction and the type and the valuation how I value and from the debt we're going to see the same topics okay what kind of um of uh depths are we going to face or the opportunities of facing debt at this point and the valuation of the bonds what and at the end what do we choose okay we will see it's a very interesting um topic because we are very clear that we want to expand. We're very clear about the type of asset and we have the sources of capital because we have cash. Let's say that we have cash in our in in our banks

and we have that opportunity. Let's face out to see how it goes. So let's go to the next slide. So in finance and accounting equity and this is something that I want to I want to distinguish because we can get confused sometimes of uh what is uh equity. Okay we have um uh in accounting we have equity which is associated with the owners what the business is worth. Remember asset liability owner's equity asset man's liability equals to owner's equity. So that's one kind of equity.

Okay, that can be computed by a business power uh the book value of equity or the difference between the asset and the liabilities as we mentioned. And the other one it's the market value of a of um of a public business or share price. So make sure that we know uh that we have two ways of computers in here. We want to understand that market value or whatever market in terms of equity.

Okay, we have the book value or whatever we're looking at the balance sheet and what we learned in few lessons back and the other equity which is the market value of a particular business. Okay, it's it's the share price that we see in a few cases back the c the the value of a particular stock from a build uh from a particular business times the number of shares. Okay. So this is the the the equity that we're going to study in here. Okay. So the type of equity basically are two. Okay. We have the common stock what we cover in the balance sheet that um that we uh when we calculate a f few um market uh financial ratio the market value financial ratio.

We have the common stock which is a security that represents ownership in a corporation. It has full rights. Okay. When you mean that full rights it means that you have voting rights there. Okay. the owners of a particular uh the owners or common stockholders of a particular business they have full ownership and they have full voting rights and full rights of that. Okay. So uh they will receive if the company hopefully makes uh profits and it's a dividend paying business we will see dividends in the future. Dividends are the profits the way that their business distribute profits it's called dividends. So if they are they are entitled to dividends and any of the capital appreciation of the value of the security. The common stockholders on the other hand are the are the owners of the business. Yes, that's very nice. But in an event of bankruptcy, they are the last ones to get paid. Okay, there is like a a

hierarchy in terms of payment. This is something that is very well established in the system. And the last ones are the stockholders. So if there is some residual value whenever the bank the business is in bankrupt it will go to divided to the common stock uh to the common stockholders um in the proportional way. So if I if if there is left $100,000 and I'm owner of 10% I receive $10,000 of what it's left in here. So this is one of the tradeoff. Okay. So another thing is that the dividends in the common stock are not fixed. Okay, they are not fixed, not even guaranteed. Okay. And we would see it from different challenges time that the that the economy had like the financial crisis in the United States or the financial crisis in Europe in a few

years back or when we saw the pandemic um recently. So whenever we see uh all of these uh situations particular situations most of the businesses they decided not to pay dividends. Okay. So in dividends in common stock are not guaranteed. It's a best practice to do it and if you don't do it it's not reputational is not very well and from the perspective of seriously or or um let's say responsibility usually business don't do that okay uh because people are expecting their cash flow they're expecting their earnings but if there is a particular situation there are no fix and no guarantee okay the and then we have the other type of stock which is more associated with investors, okay, with investors that are looking for current income. Current income is

the income that you need monthtomonth, periodto period, cash flow, regular cash flow for those particular um business uh businesses or or particular individuals that want to invest in this particular stock. It's called a hybrid stock because it has the two features. It has the feature of being a stock with the feature of being a bond because the bond pays you regular coupon, regular interest. So this type of of stock, okay, this type of equity pays you regularly, usually every three months pays you interest. Okay, and that interest is fixed. Okay, so it's very important that you know in terms of hierarchy, it has a particular hierarchy. of course is on top of the common stock in case of bankruptcy but um it's a completely in terms of voting rights. Okay. In in terms of voting

rights uh they don't do not have voting rights whenever you want to make decision for the business. It's ownership in an hybrid form. Okay. So they do not have the same of the common stock. They do not have a fixed maturity. They do not expire. you can buy it and it it would last forever unless that there are some corporate actions that decided to buy back those particular securities. Okay. But usually they do not expire. Okay. And uh in terms of taxes, they have some particular um benefits. It's benefits and drawbacks. Those are things that you have to study depending on where you're living. In the case of the of the the the United States, the dividend is not tax deduct deductible because consider uh is considered income interest income from a particular uh investment.

So prefer stock um as I said they have no boarding rights and they do have uh preference with common equity regarding to dividends they are paid before common stock and it's fixed and usually every three months okay and they are pre they have preference when they claim on assets okay they go first so those are the particular characteristics on the other hand as I said they do not have voting rights.

So how do we um valuate uh the the equity the valuation of how much is is how do we come up with the right value of that particular stock. Okay. So in common stock valuation is the method of determining the intrinsic value. Okay. Okay, the intrinsic value because you make a lot of assumptions in there and you are assum it's a smart okay the market makes smart adjustments and usually the market u adjusts and understand those values that probably you and me as a common human being do not see but the market understands very well. So the intrinsic value and globals every uh compiles all the value that it's in the that it's

particular in the in the in the business that we don't see like future cash flow we're estimating something we're estimating a value me personally I'm estimating a value but the market what I mean by the market is the full infrastructure like the powerful players in the market are like investment markets they do have sophisticated way of determining the intrinsic value. Okay. Sometimes most of the time the intrinsic value is the actual value because if it's higher you don't buy it because it's too expensive. If if it's lower everybody's going to run to buy it until it gets to the equilibrium part.

So the importance of value in stock is the fact that the intrinsic value of the stock is not attached to a current plan. So when we know that when we know that the the value of the stock it's undervalued or overvalued we have an opportunity to make a decision to create value for our firm. Okay. So the holder of one share of the company um the way that it works in here and how much it's a person worth or a share if or how much do you have of those particular value.

If you have one share of 1 million, you are the owner of one in a millionth of that company. Okay? So if that company is worth a million dollars and you have one share, you are the owner of $1 of that worth. Okay? So the value of that share represents of the company worth and they are two types of valuation. You have the absolute method which rely with the company fundamental information.

Remember that we talked about fundamental analysis. Okay, that's found in the business financial statement. We saw that a few lessons back. So the method techniques that are involved in there are dividends or growth rate like the dividend discount model. This is a model that is b of the intrinsic value stock price that equal to the present value to the dividends in the future. So you anticipate the value of the dividends in the future estimate a return rate or estimate a a a rate to bring that money back to the present and that's the way that you calculate the value of the business. So you have the money today. You estimate the value for the business in the future. You put a rate there, a rate that you and your as a corporate manager identify that it's a right rate to measure that and you bring that cash flows to the present. Okay, that's the dividend discount model. We

will see an example in a minute. Um so um the they um the basic formula uh for for this it's um the it's um it's the present value of the stock or P. It's D1 which is the next year estimated dividend. Remember we are bringing that future dividend to the present divided minus the cost of equity which is the rate that we divided and the growth rate of the dividend. We will see an example in here. Let's say that company A, B and C paid a dividend of 1.80. Let's use another currency because we are a global uh a global business school. So this is 180 per share this year and the business spend the dividends to grow by 5%. This is something maybe I'm putting some numbers

in there but those numbers are in the head of every finance department of the business because you have investors and you have to tell them where are you going to grow how are you going to grow and the expected growth rate that's something that you will find probably in the annual report where you have all the information about the business past and future performance okay and the cost of capital of equity is 7% we will see the cost of capital um in the future. But what is the important part of this the cost of capital of equity? So let's see we have the information here. Okay, we are calculating where is it going to be the dividend in the future. So the dividend in the future is going to be today's dividend times the growth rate.

Okay. So when we estimate the D1, okay, which is the dividend in the year one, we decided that it's going to be 1.89 because we decided that we're going to have a 5% growth rate in the dividend. Okay. And the dividend that we paid it was 180. So it's a very much mathematics in here. So in here we decided that to use the cost of for my business, the cost of equity capital. How much is it costing me to acquire the particular uh stock? It's 7% minus the 5% which is um the um the growth rate. It gives me a 2% that I have in margins. So in here, okay, the uh the company the the current list the the company must be selling

their stock at 9450. Okay, if it's 94 or if it's 93, it's an opportunity there to buy to gain $1. Okay, if it's 95, it's too expensive. Okay, so this is the the the cutie about this. Okay, the dividend discount model is a very we're talking here about making manual calculations. But all of this is most softwares, okay, sophisticated softwares. What I want you to know is the basics for this calculation. And this is the method that we use to calculate one of the methods which is the absolute method which relies on the dividends bringing back the present value of the future cash flows that we're going to receive based on an expected growth rate and the cost of that particular equity in the future.

So uh the analysis of uh the financial information absolutely is based on the company fundamental information. We know that these are in the financial spa h statements and the method techniques in bush cash flow dividends and growth rate. Okay. So this is the dividend cash flow. So another um another one that we uh calculate is the relative. We have the absolute we have the relative and this is more um if you want to uh this is more like for human beings like you and me. So what we do is like we calculate or we estimate the dividends of a similar business. Okay. Comparable.

We uh study a few um lessons back. We study um car rental company probably. We study AB's budget. Probably we want to compare that particular dividend with the dividends that were paid to investors in Hertz. And from there you compare. Okay. From there you compare you have a comparison and using key ratios like in in the market value of finan we we talk about financial um financial ratios. In financial ratios we calculate some market ratios and from market value ratios we can have a lot of information here. So the thing we have the absolute which is a very technical very sophisticated and the other type that we have it's the relative which is more if you want to give a guess of how are you should be just take a look at your similar companies if you're Apple

go to Samsung if you are in Amazon probably um go to the um I don't remember the Chinese uh delivery um business um if you want want to go to H next week probably you want to check on Amazon Prime Videos so go to similar company if you want to go to Toyota probably you check Nissan good similar businesses understand what the dividends are Nestle Coca-Cola they're basically the same they're big uh they are more focused on Nestle is more focused on on many other brands but probably if you are looking in that particular segment check on what the dividends are and make sure that you understand the relative. Okay, the relative is comparison. Absolute is more technical based on growth, estimated growth of dividend, the expected cash flow in the future and the cost of that

equity and you bring all of that to the present. Okay. So, we go to the second part. We we have one source. We have this is like the third source because the third source the first source is like no financing at all. Okay, that's a possibility. I'm not saying it's a zero chance but it's a possibility. Not very well used but it's a possibility if you want to do and it's part of your strategy. We talk about equity. Remember equity is ownership.

Okay, equity is ownership. This h equity is ownership and we mention two type of equity and from that type we have the valuation with and the valuation is for the common stock preferred stock do not have valuation because they don't provide full ownership remember they are hybrid okay the second or the second way of financing okay is through bonds okay you can finance um or to through third parties Okay. Not not by bringing cash by bringing more investors in form of equity. But you can bring you can come to a bank. Okay. If you want to find um sources outside, you can go to the bank in the source of debt. Okay. In debt, you can do two things. You can go to a bank and ask for a loan. That's one way of doing here. But the one that we're going to this is pretty much basic and I don't think uh you need very much

explanation of this. You know how the bank the loans works. They give the bank gives you money. You pay the capital interest periodically for a particular time if it's a regular uh loan that they give you. Okay? There are different kinds of loans depending on that. But the essence is that they give you money, you pay a premium for that. That it's the interest that you pay to whoever is giving you the money. So now we have the bonds. Okay. The bonds is a more interesting feature. I'm not sure that that you have been exposed to pond but do not worry we will explain as many times as you need it okay I'm here to assist you but the bonds are debt okay the bonds are debt because people or investor buy bonds and bonds are interest only fixed income loan okay you b the well the borrower or the investor

will I I mean the the lender or the or the business will pay interest on every period. Usually bonds pay period pay interest every six months. There are other features other type of bonds but most of the time it pays every six months but the principal or the amount of money you lend the business some money they pay you a coupon or interest for that every six months. The difference between the equity and the bond is that this has a maturity. There are some bonds that are perpetual, but this is nothing that we're going to cover today. But most of the features of the bonds is that they have a maturity.

They expire and you will receive the capital that you investment that you invest in that particular period whenever the expiration is unless you sell it in advance. Okay? So they are issued not only by businesses but they are issued by governments usually um the you can see it in the uh government bonds like uh German uh German bonds German government bonds uh treasury bonds from Spain uh treasury bonds from the United States the US uh government bonds but most of the what we're going to study here is corporation because government has other features of have the same features but other characteristic but in our case okay we're going to study the cor the corporate bonds because we want investors to buy uh to fund our our projects and some of them I invite you

to be curious on the web and check on the internet most of the uh of the big projects are financed by bond by bond issuance and usually Usually bond issuance in a particular characteristic they have what is the purpose of that because sometimes you want to know where you're putting your money with. Okay. So the bond borrows capital from the bond holder from the investor. I am the company. The investor give me $1,000.

I am obla I am mandatory to give them interest. Let's say that the interest is 5%. The way that you calculate the interest it's something that it has to be catchy from the market because if I am uh if I am asking for money from a particular investor from investors my deal has to be better than they going to a bank. Okay. So they make fixed payment um usually fixed payment every six months. That's the way that bonds work.

And at the end of the period they receive the money that they are going to uh that they invest. Usually bonds last for 10 20 30 years are launching investment. The people or the investors are not necessarily need to keep that investment until that particular maturity. they can sell it anywhere. Whenever they have the need for the cash or whenever they think that they find a better need that they need the cash flow for whenever they see that the company is not performing well, they will be able to sell it at no problem. Okay. So, um we have conventional corporate bonds.

uh they there are other type of um the corporate bonds are the one that I am talking to the conventional they pay interest with they have other that are floating rates it's extremely these are extremely sensitive and are tied to a particular uh benchmark which could be the T bill from the United States or the base interest rate from Europe. So floating rates are the rates that are I just want you to know that they're available here. Uh are are very much uh it sums up a little bit more of risk because all of investments are risk maybe little or less but those investments involve a little bit of risk. We're going to be covering corporate bonds. Okay. So this is um um flo I just want to know I just want to introduce you that there is something that it's called floating rate b and you can finance your projects with these kinds of bonds okay and governments it's very important governments they finance

their projects like roads and hospitals and things like that with with the bond issuance in in in case that they don't have money like let's say that be corporation wants to raise 1000 I'm providing here an example They want to raise $1,000 for 30 years to fund a plan expansion. Okay. The interest rate on similar debt issued by similar corporation is 12%. You cannot do anything for less than 12%.

Because you you're if you want to raise $1,000, you won't be able to raise it. Okay? That's going to be the thing. So that that's what they're going to do. they will pay at least 12% interest because if they decided that they will pay 11, nobody's going to buy that investment. Why settle for 11% if you can find it out there with similar businesses for 12%. So I'm paying 12%. So the way that it works is that I will be paying $120 per year which is 1,000. I am investing 1,000 paying 12% I will be receiving $120 per year for 30 years. Okay? And at the end of 30 years I will be receiving $1,000. Usually this 120 is $60 in six months and $60 in the other. But what I want you to do from this exercise is the

fact that this is the way that it works. You find an investor, it's willing to provide you $1,000. The bond lasts 30 years. You want to keep it until maturity. You keep it until maturity. You receive for 30 years. By the time of issuency, $120 and at the end of year 30, you will receive your $120 for the year interest plus the $1,000 that you receive. Okay. The uh bond market is a market where participant can issue death. They are not as a primary market.

They buy and sell debt depth securities. Bonds are debt known as the secondary market. This is usually in the form of bond but it might include some notes, bills and so other um on so other um type of debt for public and plyback expenditure. In here we're going to see bond financing which is what we're going to cover the lesson. In the bond there are some terms that I want you to know which is the term of yield. Okay, yield or interest rate uh changes in the concept of yield is that has to be it's attached with interest rate because interest rate changes in the market play what the market what the cash flow stays the same okay so if interest rates goes up let's say from 12 it goes to 13 okay what's going to happen there you as an investor have to make a decision the fault the value of the bond fluctuates so the value of the bond it's called a here. So if interest

rate rises the present value of the bond remain uh of the bond cash flows remains uh declines and the bond is worth less. Okay. So make this is a a this is a a general rule. If you have a bond if interest rate rises the price of your bond will go down. That's the way that it uh that it works. The same way happens on the opposite. Okay? And this is because of the cash flows stays the same. So yield it's the new interest after the bond was issued. The new issue and you want to make sure that that deal it's according to what you need. Okay.

So yield it's the return from the bond. It's the interest return from the bond. If the price changes to to interest rate, the yield will change. So we have a very nice example here. Let's say that we have an investor that buys a 1,00 uh dollar a 10,000 yen um uh bond a 10% coupon and it's held until maturity. The issue which is the corporation will pay them 100 g per 10 years because we have that particular the 10 years is the is the maturity of the bond. Okay. And in year 10, they will pay the 1,000 yen plus the 10% coupon or the 100 yen that they will receive. So this is the way that it comes. Okay.

Another concept is the concept of yield to maturity. Okay. So yield is a figure that represent the return from the bond. That's what we say. Okay. And the price of the bond it's due to change in interest rate. So as the price changes the yield will change. So we provided a very nice example here. So if interest rate change in the market play while cash flow stays the same the coupon the value of the bond flo. So if interest rate rise the present value of the mo of the bond's remaining cash flow declines and the bond is worth less and the interest rate falls the bond is worth more. Okay. So what is the catch in here? Where should we go? We understood the features of debt. We understood the features of equity. What what is the deal with this? Okay. Where should we go? We have cash. We have equity. We have debt financing. We we want to we're focusing not in what we have in our

bank. We're we're talking about financing. We know how um to price uh debt. The way to price debt is through the coupon. It's very simple. Okay? There are no models in here. It's through the coupon or the yield. That's the way that you price um debt financing. The yield. That's the how much is it going to cost you through the yield or through the coupon depending on where is the time. Okay. In the equity we calculated two ways. We've calculated the dividend discount model which is based on the intrinsic value of the stock based in particular um numbers in there and we calculate also we we guess or we have a very nice catch of what would be the interest rate based or the dividends or the valuation of the firm based on similar businesses. Okay.

So uh what's the decision relied on? Which is a particular best way for a particular business. So the decision relies in the particular economic client. Okay. If the interest rates are low, of course you should use bond. That's something that uh that you shouldn't think about. If interest rates are low, you should use a bond financing, okay? Or debt financing in anywhere. Okay? So um usually the cost of debt is lower than the cost of equity. Okay, that's a a general because of the kinds of h costs that are involved when you generate equity. But you the remember the equity the the bond the depth it will affect your leverage ratio. So just make sure that your leverage ratio is not completely

impacted by that particular decision. Okay. So where do you want to where do you want to make considerations? When you want to make considerations where do you want to go? So um first of all as I said you have to consider where in the life cycle the market it's going. If it's an expansionary, you should take probably um ways of getting cash from people. Okay. If it's contractionary, probably you should get um which is you should get money. Okay. From from the issuer in the form of of bonds. Okay. But there are some consideration when making financial decision. Deputation cost.

Okay. How much is it going to cost to issue each? The interest rate. Remember if interest rate are high probably you want to go with equity financing because you don't want to pay high interest okay and if you issue bond with high interest probably you have to go to a particular uh recall of that particular bond and buy it back through a corporate action which is costly and expensive you know and reputationally it's okay but it's it's something that you don't want to go the business grow okay the business growth is is very important usually you are Most of you mo are interesting in making some um entrepreneur trying to develop so much um of a you want to go into um this kind of labs to create new products and services that very innovative that create value and that and that are rare in there. So for that you need equity

investors. So what are the costs of and pros of this? Okay, we saw uh some of the costs that we have to consider. We saw the pricing of it. What are the things that we have to know? Understand where do you want to go? And it depends on the business and how the business handles their control. I used to work in a business that want to remain control of their operations and for that they finance everything through bonds. Okay?

because bonds does not give you does not give the owner of the bond any kind of ownership. Okay, it's uh riskier in terms of providing leverage to the firm but my business did not want to uh surrender the control of the operations to other remember equity is an owner and the owner has a vote and a vote gives you the power to decide along with the rest of the shareholders. So what is particular and why? So the pros uh uh the pro it doesn't dilute the owner uh um of the debt financing. It doesn't dilute the ownership. So if you have earnings per share and you want to distribute that among owners, you will have the same amount. If not, you have to dilute it in more people. Okay? The the lender doesn't claim for future profits. Debt obligations are predictable and can be planned. You plan that in your in your cash flows. Okay,

the interest are taxdeductible and the debt financer offer flexible alternative by collateral. You can ask you can leave a bond there and they can lend you money. Banks can lend you money because it's a tangible asset. Okay, it's an intangible asset that represents value. So you can get money out of that. Okay, the concept about that is that you have to repay that. In equity, you don't repay this ownership. Okay, it's difficult uh to qualify although we have certain uh credit uh rating businesses around there that they do very nice job and of course you want to have something that has a very good grade an A grade or AA grade. Okay. Um some uh um make sure that you understand that if you if you uh generate debt through bonds your leverage ratio is going to be affected. Okay. And probably the

financial risk of the company is going to be in observation. Just make sure that you know that you are in there. Okay. And in case of default your asset could be restricted from any other use that happened with all the bankruptcy of the firms. So the cost of the the the constant pro of equity finances you don't have to pay uh dividends no obligation to pay dividends on on equity. If they are equity paying dividends, you pay. But if you don't have the obligation to do so, um you can have very good investors. Okay? You can have money if you have the right investor. You have flow money. Improve of financial h improve the financial health of the company by not issuing bonds because it's not going to be leverage in there. Okay. What's the tradeoff in here? The tradeoff is that

you are rendering control. You're rendering ownership. Okay. The equity have higher qu equity cost in general terms and you have to be a very nice business to attract uh investors. Okay? Especially if you're a new one. So the decision depends of the type of business whether the advantage of weight the risk and most companies are not use the one or the other. They use a blend.

They use a percentage to finance project. They use a percentage from um money that they have on their own. They use a percentage of equity and a percentage of debt. I mean, I'm not saying that you have to use one or you have to use the other. You can use a blend. That's a perfectly fine. And this is something that we're going to be seeing in um in the in a whole chapter in a whole lesson that it's about the weighted average cost of capital. We will be covering that. But just something that I want you to get aware of.