chapter
9
Capital Stocks
Lonni Steven Wilson, Medaille College
Key Chapter Objectives
• Compare the different classes of stock available.
• Describe the rights of a stockholder.
• Understand how a company decides whether to
go public.
• Describe how a smaller sport business can issue
stock.
Key Terms
stock certificates—Represent an investor’s
ownership right in a business.
stockholder—Pays a designated amount to acquire
an ownership interest in a company; also referred
to as a shareholder.
Types of Stock
Common stock
• Represents an equity ownership in a company
• Voting rights
• Risks include loss of one’s investment
• Obligations could include the prohibition of selfdealing or taking a business opportunity for
oneself
Preferred stock
• Requires dividend payment before common
stockholders can receive their dividends
• Dividend cumulative if not paid in a given year
Preferred Stock Benefits
• The right to dividend payments before common
stock shareholders receive dividend payments
• Preference as to assets in distribution
• Voting power for preferred stock, available under
limited circumstances
• Strong redemption provisions
• Subscription privileges to future stock offerings
• The right to convert preferred stock to common
stock
(Bogen, 1966)
Shareholder Rights
• To receive evidence of ownership such as a stock
certificate (see figure 9.1)
• To transfer the stock freely, within limited rules
• To exercise the right to vote in person or by proxy
as set forth in the corporation’s bylaws
• To receive dividends and other disbursements on
a pro rata basis according to the number of shares
held
(Bogen, 1966)
(continued)
Shareholder Rights (continued)
• To receive disbursements on a pro rata
basis when a partial or complete liquidation
of corporate assets occurs
• To bring action on behalf of the corporation
against board members who do not act in
the corporation’s best interest (commonly
referred to as stockholders’ derivative
actions)
(Bogen, 1966)
(continued)
Shareholder Rights (continued)
• To obtain information from the corporation to
help safeguard the stockholders’ investment
(such as an annual report)
• To subscribe pro rata to new shares of
company stocks when authorized by law
(commonly referred to as stockholders’
preemptive right)
(Bogen, 1966)
Decision #1: Going Public
The first step for any corporation is the decision
whether or not to go public
A company must consider the following:
• Advantages of going public
• Disadvantages of going public
Advantages of Going Public
• Owners are allowed to diversify their investments
instead of having all their assets locked into the
company.
• A liquid asset is created (a privately held company
would be harder to sell).
• Going public helps raise new cash for growth.
• A value for the company is established based on
the combined value of outstanding shares.
Disadvantages of Going Public
• Increased operating costs are associated with all the
quarterly and yearly reporting requirements.
• The company is required to disclose sensitive data that a
competitor can use against the business.
• Self-dealing and nepotism are not allowed.
• There is a risk that the value of shares will drop if the
market for the shares is slow and they are not traded
enough, or if the company or its sector falls into disfavor.
• Loss of control of the business is possible if investors
acquire enough stock.
(Brigham & Gapenski, 1994)
Advantages of Financing Through
Stock
• There is no fixed cost associated with issuing
stock, whereas a company that issues bonds or
commercial paper will have to allocate a fixed
amount in the budget for debt service.
• Common stocks do not carry any fixed maturity
date at which they will need to be paid.
• Issuing common stock can help raise new capital
without affecting the company’s bond rating.
• At times, such as when interest rates are low and
the demand for bonds is also low, it is easier to
sell common stock.
Disadvantages of Financing Through
Stock
• Issuing bonds or commercial paper provides a
predictable fixed cost for repayment in contrast to
stocks, which represent a stake in the company’s
future profits.
• The costs associated with issuing stocks and all
ancillary activities can make issuing common stock
more expensive than issuing preferred stocks or
debt instruments.
• Some investors may see issuing new stock as a
negative sign that the company needs to sell more
of itself in order to survive.
(Brigham & Gapenski, 1994)
Decision #2: Publicly Traded Stock
The second step, after a corporation decides to go
public, is to determine whether the stock will be
publicly traded.
• Going public is the process of making a
company’s ownership available to new potential
owners and investors.
• Going public does not mean that the shares will be
available to the general public.
Phases of Selling Shares to the Public
• Initial public offering (IPO)
– private offering: the first time shares are ever
sold
• The secondary market
• The primary market, which exists for companies
that have already had an IPO but want to issue
more shares to generate additional funds
Buyers of New Shares
• Existing shareholders on a pro rata basis
• Investment bankers, who will then sell the shares
to the general public in an IPO
• Several major purchasers in a private placement
• Employees in an employee stock purchase plan
• Buyers in a dividend reinvestment plan
Investment Bankers or Houses
Their services include the following:
• Giving advice on the security type to offer and the exact
terms of the issue
• Giving assistance in underwriting a security issue
• Purchasing a security issue outright
• Helping a company comply with state and federal
requirements
• Distributing new securities to investors
• Helping stabilize the price of a new issue by buying shares
in the marketplace to support interest in the issue
• Providing additional advice after a security is issued
(Bogen, 1966)
Securities With Little Regulation
• Government-issued securities
• Short-term notes that mature in less than nine
months
• Securities offered by nonprofit issuers such as
youth sports organizations
• Insurance and annuity contracts issued by
insurance companies
• Securities issued through a corporate
reorganization in exchange for prior securities
(Cheeseman, 2001)
External Factors Affecting Stock
Values
• Labor disputes and unwillingness of players to
cross the picket lines to play
• Environmental regulations affecting the arena
• A change in workplace safety rules that apply to
operating the team
• New rules related to employment practices in the
workplace such as the classification of food
vendors as employees rather than independent
contractors
• The folding of a rival league or the success of
another league
Internal Factors Affecting Stock
Values
• Whether to trade a star player or hire a new coach
• Whether to increase the number of preseason
games
• Whether to borrow money for expansion or issue
more stocks
• Whether to declare a dividend
• Whether to consolidate television and radio
broadcasting operations in-house
Questions for In-Class Discussion
1. Have you ever purchased stocks yourself or been
given stocks? If you purchased them yourself,
what factors went into buying those shares?
2. Would you ever buy any sport stocks? Why or
why not? Which ones would you purchase?
3. Have you ever lost money on an investment?
Explain what happened and what you learned
from the process.
4. Do you think it is a good investment to buy the
publicly available shares in the Green Bay
Packers?