Corporate Finance (BM02FI)
Complete Summary
RSM 2021-2022
Laia Neira Quintanilla
,LNQ BM02FI Corporate Finance 2021
MODULE 1
1.1 CORPORATE CLAIMS
1.1.1 THE BASIC BUILDING BLOCKS
The capital structure is the sum of the total claims on the assets of the firms All the claims
represent all the firm’s assets (they are the firm).
We have more claims besides pure debt and equity: non-financial liabilities, pension and
employees’ liabilities, government claims, etc.
Thus, despite the common notion that equity holders “own” the firm, they only own it after all the
obligations are satisfied. Equity holders are residual claimants, if the obligations are not satisfied,
they do not get nothing if a company is liquidated.
1.1.2 KEY FEATURES OF CORPORATE CLAIMS
2 kinds of rights:
Cash flow rights: determine how firm-generated cash will be allocated
Control rights: allow claim owners to enforce their cash flow rights
Capital structure determines how rights are allocated The total value of each stakeholder (debt
& equity and other claimants) sums up the total value of the firm.
1.1.2.1 CASH FLOW RIGHTS (ILLUSTRATED BY PAY OFF DIAGRAMS)
Payoff diagrams plot payoffs as a function of the underlying firm value at a fixed time
However not good at illustrating the time varying aspect of claims So we usually select one
point in time and draw the diagram for that point in time.
Example: Firm has outstanding debt of $200
Valur
,LNQ BM02FI Corporate Finance 2021
MODULE 1
1.1 CORPORATE CLAIMS
1.1.1 THE BASIC BUILDING BLOCKS
The capital structure is the sum of the total claims on the assets of the firms All the claims
represent all the firm’s assets (they are the firm).
We have more claims besides pure debt and equity: non-financial liabilities, pension and
employees’ liabilities, government claims, etc.
Thus, despite the common notion that equity holders “own” the firm, they only own it after all the
obligations are satisfied. Equity holders are residual claimants, if the obligations are not satisfied,
they do not get nothing if a company is liquidated.
1.1.2 KEY FEATURES OF CORPORATE CLAIMS
2 kinds of rights:
Cash flow rights: determine how firm-generated cash will be allocated
Control rights: allow claim owners to enforce their cash flow rights
Capital structure determines how rights are allocated The total value of each stakeholder (debt
& equity and other claimants) sums up the total value of the firm.
1.1.2.1 CASH FLOW RIGHTS (ILLUSTRATED BY PAY OFF DIAGRAMS)
Payoff diagrams plot payoffs as a function of the underlying firm value at a fixed time
However not good at illustrating the time varying aspect of claims So we usually select one
point in time and draw the diagram for that point in time.
Example: Firm has outstanding debt of $200
Valur
, LNQ BM02FI Corporate Finance 2021
1.1.3 TYPES OF CORPORATE CLAIMS
1.1.3.1 FINANCIAL LIABILITIES (DEBT, BONDHOLDERS)
Cash flow rights: Bonds are like loans that promise specific payoffs at specific times in the
future
Control rights: No control rights, unless the firm fails to pay what is promised or unless a
bond covenant is violated. Then they have the ability to force bankruptcy.
1.1.3.2 NON-FINANCIAL LIABILITIES
They are of the of similar magnitude as financial liabilities Examples: account payables, trade
credits, leases, warranties and tax obligations.
Control rights can be weak (e.g., customer warranties) or strong (e.g., tax obligations).
1.1.3.3 EQUITY (COMMON STOCK)
Cash flow rights: After all other obligations have been paid, but unlimited upside
Control rights: Equity holders (i.e., shareholders) can elect the corporate board, which
appoints and supervises management. Basically, in control of the firm.
1.1.3.4 OTHER TYPES OF BONDS AND EQUITY
Bond features: Seniority, covenants, coupons, etc.
Convertible bonds
“Share classes” that can allow different voting rights vs cash flow rights.
Preferred equity has some equity and some debt characteristics
Warrants and options give their owner the right to purchase stock in the future at a
predetermined price.
Example:
Senior 150$
Firm value • bondholders FV →
Payoffs
:
^
Junior bondholders FV 100$
different
>
•
-
:
(value •
Stockholders
claimants)
-
zoo
250
iirm
bondholders
If
-
FV < 150, all to senior
200 -
150 senior, 100
f- ✓ 250, Junior
- - --- - - -
Iso
i jig
-
=
-
g-
- - -
100 - - - - -
- - -
:
100 and
FV > 250, 150 senior, junior ,
50 -
If
whatever is
left to stockholders
Value
Complete Summary
RSM 2021-2022
Laia Neira Quintanilla
,LNQ BM02FI Corporate Finance 2021
MODULE 1
1.1 CORPORATE CLAIMS
1.1.1 THE BASIC BUILDING BLOCKS
The capital structure is the sum of the total claims on the assets of the firms All the claims
represent all the firm’s assets (they are the firm).
We have more claims besides pure debt and equity: non-financial liabilities, pension and
employees’ liabilities, government claims, etc.
Thus, despite the common notion that equity holders “own” the firm, they only own it after all the
obligations are satisfied. Equity holders are residual claimants, if the obligations are not satisfied,
they do not get nothing if a company is liquidated.
1.1.2 KEY FEATURES OF CORPORATE CLAIMS
2 kinds of rights:
Cash flow rights: determine how firm-generated cash will be allocated
Control rights: allow claim owners to enforce their cash flow rights
Capital structure determines how rights are allocated The total value of each stakeholder (debt
& equity and other claimants) sums up the total value of the firm.
1.1.2.1 CASH FLOW RIGHTS (ILLUSTRATED BY PAY OFF DIAGRAMS)
Payoff diagrams plot payoffs as a function of the underlying firm value at a fixed time
However not good at illustrating the time varying aspect of claims So we usually select one
point in time and draw the diagram for that point in time.
Example: Firm has outstanding debt of $200
Valur
,LNQ BM02FI Corporate Finance 2021
MODULE 1
1.1 CORPORATE CLAIMS
1.1.1 THE BASIC BUILDING BLOCKS
The capital structure is the sum of the total claims on the assets of the firms All the claims
represent all the firm’s assets (they are the firm).
We have more claims besides pure debt and equity: non-financial liabilities, pension and
employees’ liabilities, government claims, etc.
Thus, despite the common notion that equity holders “own” the firm, they only own it after all the
obligations are satisfied. Equity holders are residual claimants, if the obligations are not satisfied,
they do not get nothing if a company is liquidated.
1.1.2 KEY FEATURES OF CORPORATE CLAIMS
2 kinds of rights:
Cash flow rights: determine how firm-generated cash will be allocated
Control rights: allow claim owners to enforce their cash flow rights
Capital structure determines how rights are allocated The total value of each stakeholder (debt
& equity and other claimants) sums up the total value of the firm.
1.1.2.1 CASH FLOW RIGHTS (ILLUSTRATED BY PAY OFF DIAGRAMS)
Payoff diagrams plot payoffs as a function of the underlying firm value at a fixed time
However not good at illustrating the time varying aspect of claims So we usually select one
point in time and draw the diagram for that point in time.
Example: Firm has outstanding debt of $200
Valur
, LNQ BM02FI Corporate Finance 2021
1.1.3 TYPES OF CORPORATE CLAIMS
1.1.3.1 FINANCIAL LIABILITIES (DEBT, BONDHOLDERS)
Cash flow rights: Bonds are like loans that promise specific payoffs at specific times in the
future
Control rights: No control rights, unless the firm fails to pay what is promised or unless a
bond covenant is violated. Then they have the ability to force bankruptcy.
1.1.3.2 NON-FINANCIAL LIABILITIES
They are of the of similar magnitude as financial liabilities Examples: account payables, trade
credits, leases, warranties and tax obligations.
Control rights can be weak (e.g., customer warranties) or strong (e.g., tax obligations).
1.1.3.3 EQUITY (COMMON STOCK)
Cash flow rights: After all other obligations have been paid, but unlimited upside
Control rights: Equity holders (i.e., shareholders) can elect the corporate board, which
appoints and supervises management. Basically, in control of the firm.
1.1.3.4 OTHER TYPES OF BONDS AND EQUITY
Bond features: Seniority, covenants, coupons, etc.
Convertible bonds
“Share classes” that can allow different voting rights vs cash flow rights.
Preferred equity has some equity and some debt characteristics
Warrants and options give their owner the right to purchase stock in the future at a
predetermined price.
Example:
Senior 150$
Firm value • bondholders FV →
Payoffs
:
^
Junior bondholders FV 100$
different
>
•
-
:
(value •
Stockholders
claimants)
-
zoo
250
iirm
bondholders
If
-
FV < 150, all to senior
200 -
150 senior, 100
f- ✓ 250, Junior
- - --- - - -
Iso
i jig
-
=
-
g-
- - -
100 - - - - -
- - -
:
100 and
FV > 250, 150 senior, junior ,
50 -
If
whatever is
left to stockholders
Value
