INVESTMENT FINANCING

By: Cassandra Aurelio

 INVESTMENT
FINANCING

DEBT EQUITY HYBRID

FINANCING FINANCING FINANCING
DEBT FINANCING, BOND
PRICES AND YIELDS
 Debt financing

Borrowing from a financial institution

with an obligation to pay
 Debt Financing
• Borrowing from a financial institution
with an obligation to pay
•Rural Banks
•Universal Bank •Thrift Banks
•Commercial Bank •Savings Bank
•Development Bank •Insurance
•Investment banks Companies
•Finance companies •Offshore/overseas
banking units
Fractional banking System

Banks take in deposits and lend out a major

portion and retain only what is required as a
reserve of the bank
 Bond
• Promise to pay a fixed amount of capital
and interest at a stated date

• Infinity bonds- no maturity date

 Bond
• Promise to pay a fixed amount of capital
and interest at a stated date
• Infinity bonds- no maturity date
CREDITORS DEBTORS

Lends money Owes money

Do not require debtor’s Requires creditor’s

consent consent
Bonds are safer than stocks but do
not participate in the firm’s success
 Yield
• Income return on an investment such as
the interest or dividends received from
holding a particular security

• If bonds are not highly rated, it carries

higher risk but a higher yield as well to
compensate the risk
EQUITY FINANCING
 Stocks and Ownership rights
• A firm can issue shares of stocks as an
alternative to raise funds

• Preemptive rights allow existing

stockholders to preserve their ownership
by buying shares proportionate to their
holdings
• Common stocks represent ownership, right to
vote, and receive dividends
• Dividends are distributed either in the form of
cash or stocks

*The firm must always weigh the prevailing

market conditions and look at the present and
future interest rates the consider what is in
the best interest of stockholders in deciding to
use debt either as loans, bonds, equity
financing, or combination
Investment Decision Making Process
Budget Process of Firms

Operations Capital
budget budget

*Both are done together separately but

simultaneously
Operations budget- covers the budget for
1 year up to 3 years and contains
projections of profit and loss

Capital budget- Represents the capital

requirements and the firm’s strategic
directives over the next 3-5 years
HYBRID FINANCING
 Hybrid Financing
• Combination of both debt and equity
financing

• It includes Preferred shares, leasing

warrants, and convertibles
 PREFERRED STOCKS

• Preferred stocks have no voting rights

• They have both the features of common

stock and a bond
 LEASING
SALE AND LEASE
BACK WITH AN OPERATING
OPTION TO LEASE
PURCHASE

CAPITAL LEASE
Sale and Lease back with an
option to purchase

Sells property and assets it owns and

simultaneously execute an agreement to
lease back the property at a fixed rental
 Operating lease
• Service lease

• Mainly for equipments that is subject for

obsolescence

• Retains ownership rights of the lessor and

rarely transfers to the lessee
• Renting
 Capital lease
• It does not provide for maintenance services,
not cancellable, and are fully amortized

• The lessor pays the full price of the leased

equipment

• The property is not reflected as an asset and

only lease rentals are reflected as expenses
• Loaning
 WARRANTS
• Long term options to buy a stated number
of shares of a common stock at a specified
price for a specified length of time

• Distributed with debt and are used to

induce investors to buy a long-term debt
that has a lower coupon rate
*Stockholder
 CONVERTIBLE BONDS
• It is either a preferred share or a bond that
can be exchanged for common stock

• Debt that is converted to equity and does

not result in additional funds unlike
warrants
*Bondholder