ADOPT A LOGICAL FLOW

put yourself in the shoes (place) of those business

managers who would be attending the seminar
They are busy but professional people you must
consider the level of information and which points
may need further explanation and support
Support can be for example;
Expanding further a bullet point by explaining
exactly what is meant by the statement
Providing a practical example which the managers
could identify with;
E.g. Providing some empirical (real world)evidence
E.g. research findings, OR a company which
demonstrates the point (negatively or positively)

ADOPT A LOGICAL FLOW

Present information in a clearly structured (organised)

way - so one point naturally follows another, building up
the information
This will allow you to selectively introduce any theory,
models or other information you consider relevant
AND THE INFORMATION ADDS VALUE!! ANSWERING THE
NEEDS OF THE MANAGERS ATTENDING THE SEMINAR
IDENTIFY AT THE OUTSET (START) OF THE POWERPOINT
PRESENTATION - THE FORMAT YOU WILL BE ADOPTING
FOR EXAMPLE AT THE VERY BASIC YOU COULD CHOOSE
T0 EXPLAIN THAT;
FIRSTLY, THE PRESENTAION WILL IDENTIFY ALL OF THE
BENEFITS AND THEN FOLLOWED BY THE RISKS
ASSOCIATED WITH CORPORATE DEBT

TASK A
READ AND ANALYSE WHAT IS BEING STATED IN THE TASK A
KEY IT IS STATED IN THE QUESTION THAT THE COMPANIES
REPRESENTED AT THE SEMINAR WILL HAVE EXISTING
ESTABLISHED CAPITAL STRUCTURES
CONTAINING A MIXTURE OF BOTH PRIVATE DEBT AND EQUITY
THINK!!
WHY MAY THIS EXISTING CAPITAL STRUCTURE HAVE BEEN
ADOPTED BY THE INDIVIDUAL COMPANIES?
FOR THE FOLLOWING REASONS
a. To attract a larger volume of capital
b. To limit dilution of owners interest (voting power for example)
c. APPLYING THE PORTFOLIO THEORY TO;
d. Introduce diversification

e.
f.

TO REDUCE THE COST

SPREAD THE RISK - FINANCIAL RISK

So what can we take from this

information?
1. The subject area BEING EXAMINED is the
cost of capital
2. PARTICULARLY MANAGING THE COST OF
THE CAPITAL
3. THIS COST REMEMBER is linked to the
Weighted average cost of capital (WACC)
4. Additionally, the need to protect the
interest of exiting owners - for example
their percentage of voting rights

HOW CAN THIS INFORMATION BE

USED?
It could focus your attention on the points to draw out
(stress) when identifying the benefits AND risks of
introducing CORPORATE DEBT
Very briefly each/OR just selected points from the
previous list, (and shown again below) could be
expanded upon
a. To attract a larger volume of capital
b. To limit dilution of owners interest (voting power for
example)
c. APPLYING THE PORTFOLIO THEORY TO;
d. Introduce diversification
e. TO REDUCE THE COST
f. SPREAD ANY RISK - FINANCIAL
. See next slide as an example

For example -To reduce the cost

Explain how cost can be reduced
This could further be linked to the need to use the
cost of capital as the discount rate when applying
investment appraisal
To ensure the project earns a positive NPV and
shareholder wealth
The cost of capital acts as a hurdle
Stating the additional support is addressing the needs
of the audience and demonstrating your knowledge
Restricting yourself to this format together with
some reference to risks and benefits will probably
limit you to a pass or 2.2 (see later slides for higher
level skills)
Let us continue to examine task a)

Again, PUT YOURSELF IN THE SHOES OF THE MANAGERS

ATTENDING THE SEMINAR
Ask - WILL THEY BENEFIT FROM A LITTLE BACKGROUND
INFORMATION?
Such as;
A brief definition of a corporate debt
Noting that corporate debt is classified as public debt
Key classifications of corporate debt = e.g. promissory (loan
)notes and debentures
Division into wholesale and retail bond and stating which
type of investor does each apply
Corporate debt issued in a similar way as equity e.g. on
the capital market or by placings
Use of advisors , underwriters, financial institutions to sell
bonds other transaction costs (you can refer to the
examples given in the question)

 WHAT ARE

THE
BENEFITS OF
CORPORATE DEBT
IN THE FORM OF
BONDS?
CAN WE THINK and
SUGGEST?

SUMMARY OF KEY BENEFITS

The company has some control over the cost OF THE DEBT,
timing of repayments and expiry /redemption date This helps to
limit the financial risk associated with debt
Remember this refers to the risk associated with servicing the
debt (E.g. the annual coupon or interest payments payable in
cash )
And generating the cash required to repay the actual capital
borrowed at a future date
Remember the cost of debt is the annual return payable on the
individual debt
Corporate debt referred to as Bonds are considered less risky
than equity and therefore the investor will accept a lower rate
of return
The company can take advantage of a range of coupon rates e.g.
deep discount (maybe identify them )

Some taxation shield is allowable but it can be quite

complicated to obtain (see next slide) for examples;

The taxation shield can be quite complicated to

obtain as there are for example;
i.
Different rules for different types of capital
expenditure and the debt raised to fund this
ii. Different rules for different business sectors
(currently the media and creative sector in receipt
of generous allowances)
iii. See word document source HM customs and excise
iv. Some current information
v.
Corporate bonds particularly retail bonds have been
popular in recent years as they attract investors
who require a regular income greater than a savings
account
. (BUT who will accept a lower return as bonds seen as
a less risky security (type of investment))

Issuing corporate debt (with the exception

of convertible bonds) does not dilute
owners interest
COPRPORATE DEBT CAN BE RESOLD ON THE
SECONDARY BOND MARKET GIVING
LQUIDITY TO INVESTOR

IMPORTANT TO REMEMBER

THE CONVERTIBLE BOND

Define and explain

Added advantage company can call for a conversion at a
time which suits the company
Reduces the need for regular cash outflows once
converted
Do link to effect on cost of capital and spreding riskcost
But stress the future returns from the shares must be of
value to the bond holder especially when expressed in
present values
The return must be at least equal to the opportunity cost
e.g. keeping the bond for the full period of the bond

Ask Would a calculation add value to your presentation REMEMBER WE PERFORMED A CALCULATION IN A

WORKSHOP

 WHAT ARE

THE

RISKS
CAN WE THINK ?

KEY RISKS

LEGAL CONTRACT TO PAY COUPON/INTEREST AND PRINCIPLE

Introducing corporate debt is increasing both the finaial risjk and
financial distress
The cost of equity and debt may increase as a result
SECURITISATION OF ASSETS The investor or trust funds secure can
the assets of the company in case the company defaults on the debt.
The assets will be sold for cash this applies to Debentures for
example
Corporate debt is TRUST FUND MANAGED RESTRICTIVE COVENANTS
can be applied - LEGALLY REQUIRED TO HONOUR THEM
LESS CAPITAL GAINS ON SECONDARY MARKET FOR INVESTOR
BOND POPULARITY LINKED TO PERFORMANCE OF THE STOCK MARKET
AND DIVIDEND PAYMENTS
INCREASING DEBT LEVELS REQUIRES GOOD CASH FLOW INCREASES
FINANCIAL RISK AND FINANCIAL DISTRESS
NOT RISK FREE FOR INVESTOR

 0btaining

a higher grade
Some reminders of the
information which Has
some relevance be included
Capital structure and
gearing level is the area of
study being examined

to address this ask;

What factors will a senior manager be
concerned with? (when acting as responsible
agents?)
ANSWER = WILL THE INTRODUCTION OF ANY
NEW FINANCE AFFECT ANY OF THE FOLLOWING
The value of the company -particularly
important
Shareholder wealth maximisation
The market price of the company share
How can this be used to answer the task a)?
It can enable you to provide a more
comprehensive guidance

LET US CONSIDER THE KEY MANAGEMENT

CONCERNS
Is there an optimum capital structure?
Which achieves the lowest average cost of
capital?
Will SHAREHOLDER VALUE be affected?
CAN YOU BRIEFLY INTRODUCE OR REFER TO
THEORY SUCH AS;
THE TrADITIONAL THEORY
MODIGLIANI AND MILLER
OPTIMUM CAPITAL STRUCTURE - in practice
WACC - MATHEMATICALLY AND/OR
DIAGRAMATICALLY (SEE HANDOUT)
CURRENT THINKING

But remember only outlining the various

theories/propositions
You may wish to look for material on
current recommended gearing levels
And/or
Gearing levels in different business sectors