Corporate Treasury

Essentials of Corporate Finance

Chapters 12, 13, 14, and 15

Materials Created by Glenn Snyder San Francisco State University

Topics

What is Corporate Treasury?

Determining Capital Structure

Raising Capital

Debit
Equity

Dividend Policy

Long-Term Cash Flow Analysis

Public vs. Private
Management

Who should issue dividends?

Dividend Impact to Stock Prices
Raising Dividends

Career Advice for a Treasury Analyst

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

What is Corporate Treasury?

Corporate Treasury is the area within Finance that

analyzes the companys cash flow from an internal
perspective

Internal Cash Flow Analysis includes:

Debt Coverage
Dividend Payments
Initial Public Offerings (IPO)
Secondary or Additional Equity Offerings
Repurchase of Stock
Cash Management and Investments

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Determining Capital Structure

A companys capital structure is effectively

how a company is financed

What percentage of total assets are financed from

debt?
What percentage of total assets are financed from
equity?

Determining the best capital structure for a

company is based on its long-term cash flow
and as a going concern

Does the company have a limited life?

Are future cash flows certain for variable?

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Long-Term Cash Flow

Analysis

If the company has strong certain cash flows

for several years, it should be weighted
towards debt

Cash flow to make debt payments

Tax benefit from the interest payments
Ownership is not diluted by issuing additional
shares
Debt has a fixed time horizon

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Long-Term Cash Flow

Analysis

If the company has variable or uncertain cash

flows for several years, it should be weighted
towards equity

Less of a cash obligation for debt payments

Greater flexibility for cash flow fluctuations
Allows for long-term investing without worrying
about short term obligations
Start-ups generally issue equity as they dont
have the cash flow for the debt obligations

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Public vs. Private

In the U.S., companies tend to go public so

the owners can receive the cash
Advantages for a Public Company

Greater access to capital

Owners can cash out
Increases liquidity of the company for the owners
In flow of cash for an equity issuance provides a
cushion for the what if scenarios, and should
reduce debt financing (interest rates)

February 26,
2007

The company would be less risky with the additional

cash and stronger balance sheet
Materials Created by Glenn Snyder San Francisco State
University

Public vs. Private

Advantages for a Private Company

Less expenses

Sarbanes Oxley
Board of Directors (meetings and compensation)
Quarterly SEC filings
Costs of issuing stock

Maintain control
Can always sell the company if the owner wants
to cash out

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Management

In the end, it comes down to a management

decision

Does management believe it can make the debt

obligations?
Does management want to retain control?
Does management want to cash out?

Many companies follow the industry sector

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

Raising Capital

Companies raise capital for many reasons:

Expansion
Internal Investment

Purchasing a new building

Purchasing new technology

Acquisition
Handle Seasonal Cash Flow Needs

February 26,
2007

Ski Resort in summer time

Materials Created by Glenn Snyder San Francisco State

University

10

Raising Debt

Debt can be raised through Loans or Bonds

Loans are made through a commercial bank

Bonds are issued through investment banks

Loans would be used for smaller cash flow needs,

as they carry higher yields

When issuing bonds, a Treasury Analyst would

Do comps on similar issuances to determine maturity and

rates
Analyze the overall after-tax impact
Match the financing to the investment time horizon

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

11

Raising Equity

Equity would be issued through an

investment bank

The investment bank would help determine the

price and quantity of the shares to be issued
The company would pay flotation costs to the
investment bank for the issuance
The present ownership, if private, would receive
cash in exchange for reducing ownership in the
company

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

12

Dividend Policy

The Treasury Department is also responsible

for the companys dividend policy

Are dividends paid monthly, quarterly, semiannually, or annually?

How much per share should be paid?
What is the impact to long-term cash flow?
What will be the impact on the long-term stock
price?

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

13

Who Should Issue Dividends?

Companies that are stable and have strong

cash flows

Companies should be consistent within their

sector to maintain competitiveness
Companies whose investment base is looking for
income

Many seniors invest in Utilities for the dividend income

Start-ups and fast growing companies should not

issue dividends

February 26,
2007

Investors will have a demand for the stock for its growth
Dividends create a cash flow obligation
Materials Created by Glenn Snyder San Francisco State
University

14

Dividend Impact to Stock

Prices

Dividends increase the price of the stock

when the announcement is made and
reduces the stock price when the dividends
are paid

One of the key ratios stock analysts look at

when analyzing which stocks to buy is the
dividend payout ratio

Dividend Payout Ratio

= Annual Dividends / Stock Price

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

15

Raising Dividends

A company has to be very careful when

deciding to raise dividends

Typically dividend levels are very consistent so

that owners will know how much they will receive
Raising dividends is a sign that the company has
strong current and future cash flows
Raising dividends is usually a permanent increase

February 26,
2007

If the company does not want to permanently raise

dividends, they can issue a special one time divided

Materials Created by Glenn Snyder San Francisco State

University

16

Career Advice for a Treasury

Analyst

Understand Accounting

A strong background in accounting will help

understand cash flow analysis and balance sheet
impacts
Most Chief Treasury Officers are C.P.A.s

Treasury positions are often hard to find, but

a career in accounting or banking would help

Other options would be to find a position within a

finance department and transfer to the treasury
group when a position becomes available

February 26,
2007

Materials Created by Glenn Snyder San Francisco State

University

17