Let's start with debt, all right? 4. The NPV of the investment will not affect the decision of whether PepsiCo is going to issue debt, or whether PepsiCo is going to issue equity. 1. The benefit is that you're going to get a $5 million e flow of capital, right? That's why we have a zero NPV, right? Long-Term Goals. Meaning that if the interest rate is the same as the discount rate, so if PepsiCo is paying interest, exactly at the required rate of return, right? Okay, so the stock price hasn't changed. Can you describe a time when you helped reduce costs? 2) debt is less risky than equity is in the event of a liquidation, debt holders would receive their capital repayment before share holders. You must login or register to add a new answer. If the debt issuance, it should be correctly priced by the market.
Can you tell me about a time you had a difficult conversation with a manager or colleague in another, If the theories are not applied properly in any organization there is a high, o Houses path goal theory of leadership Contingency theories o Fiedlers least, He took matters into his own hands to solve the problems that he saw The effect, PROVIDE STABILITY Sensitive to the feelings of others you readily gauge the, Give People Reasons to Care While its important that leaders forthrightly, 786189526 Kristoffer McClelland 2000 2006 2012 Gallup Inc All rights reserved 3, Arrange for this person to attend a time management seminar He may not, According to Zaccaro Trait based leadership was discarded by man researchers as. We will then learn how to avoid usual mistakes that people make when analyzing the choice between debt and equity. If you were CFO of our company, what would keep you up at night? So, we have gone through the financial statements, right, and you learned the mechanics of debt and equity, right? And then what's going to happen? Here are some of the most important things a social…, The Agreement on Agriculture (AoA) is an international treaty of…, Here are some reasons why feedback from patients are families…, Molecular biology focuses on things like the level of gene…, IT governance is an aspect of corporate governance that enables…. But we still have to make the decision. Finally, You will learn how companies finance merger and acquisition decisions, including leveraged buyouts, and how to incorporate large changes in leverage in standard valuation models. 3) Debt is also cheaper than equity from a company’s perspective is … When should a company consider issuing debt instead of equity This question. The first is the current market value of equity, right, and the second one is the number of shares outstanding. Equity. But if you think about it, why would that be the case?
What's the benefit? So, PepsiCo is raising cash to finance this new investment. If you applied the Net present value idea to the financing decision, we are talking about now, the answer would be that the company is going to issue debt when the NPV of issuing debt is greater than the NPV of issuing equity, right? ⢠Pick an appropriate financing package for an M&A or leveraged buyout deal
This is a little bit trickier, right, because as we already figured out, we don't really have the counterpart of the interest payments. If you do the math, the answer you'll get is that the NPV is going to be zero, right? Let's talk about it. Both …
If we're figuring out the NPV of the debt issuance, the correct discount rate to use would also be 4%. How would an equity issuance change the financial statement? The zero NPV is actually a very reasonable answer to this problem. ⢠Understand the links between payout policies and company performance And it's exactly the same idea, right, that made the NPV of debt equal to 0. Which choice, steps you're going to make, steps you're going to issue that, or steps you're going to issue equity right? The examples helped me to comprehend the concepts and get a deep understanding of corporate finance. What about equity? We just have to think about the immediate consequences of issuing new securities. So, NPV and stock price are the same thing, and we can actually think in terms of stock prices here. Course Hero is not sponsored or endorsed by any college or university. At this point, you may be wondering. Right, and the question is what is the NPV of equity issuance? Right, the cash is going to come in, right?
The same thing, right? It's also the yield to maturity or the expected return on this bond, right? As the owner of your new business, it will be critical for you to think about what you actually hope to achieve in the long-run. So, if PepsiCo can issue debt at a cheaper rate, for example, then it might be positive NPV to issue debt. Which is the Net present value, right? 3. So, if you issue equity, you're going to take the $5 billion and invest in the company. Therefore, issuing equity will be a better decision and vice versa. Upon successful completion of this course, you will be able to: We have tutors online 24/7 who can help you get unstuck. We already figured out that there is a benefit and a cost, right? You will receive a link and will create a new password via email. ⢠Manage credit risk and financial distress using appropriate financial tools A company can obtain debt financing from a bank in the form of a loan, or else issue bonds to investors. Right, if the debt, for some reason, is not fairly priced, then obviously the NPV would not be zero. 2. So, how would the debt issuance change the financial statement? © 2020 Coursera Inc. All rights reserved. When should a company consider issuing debt instead of equity? So, we are relying on the assumption that the debt is going to be fairly priced by the marketplace, that PepsiCo is issuing debt exactly at the required rate of return. To view this video please enable JavaScript, and consider upgrading to a web browser that Stuck?
We would be discounting the interest payments exactly at the 4% rate.
This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. Lost your password? We covered debt.
You don't lose money, you don't make money. And then there is the NPV of investment, right, because the company is going to invest its money, and hopefully make a positive NPV. So, the NPV would the positive five there at the beginning. So, it's not incremental. If you do the math, what you get is that the stock price is $94 a share, okay? Let me show you, right, we have the old stock price, which I'm expressing as the market capitalization divided by the number of shares, $94. In this way a company can profit from the huge demand for their product while paying a fixed cost of capital. The idea is that, the new cash that comes into the company exactly compensates for the issuance of new shares. Let's try to apply that idea and see how far we get. Right, if you sell the product at a low price, you can think of the equity of the product, then PepsiCo is going to make money. A company should issue debt when the company in question has sufficient cash flows to pay interest and principal repayments only or when there is a huge market and the company does not have enough capital to meet the demand. 5. What factors? Right, so the cash that PepsiCo gets is going to increase the company's market capitalization, right? You will also learn how to use derivatives and liquidity management to offset specific sources of financial risk, including currency risks. Then what's going to happen, this is what the math is reflecting, what's going to happen is that the cost of issuing new debt, which is this $200 million annual interest, is going to exactly compensate for the benefits, right? 5. 2. Corporate Finance II: Financing Investments and Managing Risk, University of Illinois at Urbana-Champaign, Construction Engineering and Management Certificate, Machine Learning for Analytics Certificate, Innovation Management & Entrepreneurship Certificate, Sustainabaility and Development Certificate, Spatial Data Analysis and Visualization Certificate, Master's of Innovation & Entrepreneurship. The choice that is right for you will be very specific to your business. So, PepsiCo receives cash, but the counterpart is that their new shares being issued, right? So, the NPV of investment is the same, irrespective of whether you're issuing debt or equity, right? Sorry, you do not have a permission to ask a question, You must login to ask question. ⢠Use derivatives and liquidity management to offset financial risks We're not going to get the answer from here and just telling you upfront, but I think it's going to be useful, very important for us to think about this culturally, okay? The zero NPV is actually a very reasonable answer to this problem. This is another idea we covered in Corporate Finance I the equivalent between net present value and stock price. Since equity financing is a greater risk to the investor than debt financing is to the lender, the cost of equity is often higher than the cost of debt. The answer is that the NPV of the new investment is not incremento. 4. What is PepsiCo going to do with equity? Debt involves borrowing money directly, whereas equity means selling a stake in your company in the hopes of securing financial backing. The idea here is that if the debt is fairly priced, right? If you were CFO of our company, what would keep you up at night? The interest is $200 million per year, right? The lower this number is, the more attractive the company … What about equity, right?
That was our original assumption, and you might be an hour complaining in your mind or your mind might be complaining with you that we're not talking about the NPV of the new investment at all, right? Please enter your email address.
In Module 1, we will discuss the differences between debt and equity financing for corporations.
Who owns the cash, the cash is going to be owned by the shareholders. The “cost” of issuing stock is the return on investment required by stock investors. So, what this means is that it would be very reasonable, it's actually theoretically correct, to discount. Because they need capital. And in Corporate Finance I, we actually learned a tool that is the right tool to guide managers when managers are making financial decisions like that, right? Assuming a company can afford both Debt and Equity at market standards, I think the Cost of the Capital should probably be the main factor, but there are some others too. When should a company consider issuing debt instead of equity? Can you describe a time when you helped reduce costs? When should a company consider issuing debt instead of equity? Bonds have several advantages over … Of course, if Pepsi Cola manages to sell shares at a higher price than what the shares should be worth, of course, that's going to be a good deal.