Corporate Stocks
Stock Financing
• When shares of stock are sold to raise
funds for the long-term financing
requirements of the firm.
• The object of stock financing is to increase
equity capital.
• As banks adapt a discriminating attitude
towards granting long-term loans to
small and medium-scale businesses, stock
financing becomes a useful alternative.
Advantage of Stock Financing
• Raising long-term capital through stock
financing does not burden the company
with redeeming the stocks at a given
date. This is because stocks, unlike bonds
have no maturity periods. As such, funds
generated through stock financing may be
used continually without the burden of
renewal.
• Common stocks are not interest-bearing
• The issuance of stocks does not require
collaterals.
Terms to remember
• Capital Stock – interest of the owners of
a corporation
• Authorized Stock - maximum number of
shares that a corporation is legally
permitted to issue, as specified in its
articles of incorporation.
• Issued Stock – portion of the authorized
stock issued and sold.
Terms to remember
• Dividends - A share of the after-tax
profit of a company, distributed to its
shareholders according to the number and
class of shares held by them.
• Retained Earnings - The percentage of
net earnings not paid out as dividends,
but retained by the company to be
reinvested in its core business, or to pay
debt.
Classes of Corporate Stocks
Common Stock
• Class of stock issued by all corporations
and which represents the real equity
capital.
• It has a residual claim to earnings and
assets and which carries the risk of
business success or failure.
Varieties of Common Stock
• Classified common stock
– Multiple-category stock divided usually into
two classes on the basis of its benefits. Class A
is a non-voting, dividend paying stock issued
to public. Class B is voting stock that pays no
dividend but appreciates with the growth of
the firm. (businessdictionary.com)
Varieties of Common Stock
• Deferred Stock
– A minor type of issue which entitles the holder
to receive dividends, and in the event of
dissolution, assets, after the common
stockholders have been paid.
– This type of stock is generally issued to
founders,
Varieties of Common Stock
• Voting Trust Certificate
– Given to trustees of a corporation when the
activities of the corporation are entrusted to
them. The certificates provide the trustee
with the power to vote. Voting trust
certificates are issued when an attempt is
being made to make certain that the voting
power remains in certain hands for a period
of time.
Varieties of Common Stock
• Guaranteed stock
– A stock in a company for which another
company or bank promises to pay dividends in
case the issuing company defaults.
• Debenture stock
– Not a stock in the real sense; instead, it is a
debt issue similar to debenture bonds. They
are fixed-interest securities issued by limited
companies in return for long-term loans
Advantages
Disadvantages
• It does not entail fixed
charges – dividends are
paid when profits are
realized by the company
• No fixed maturity date
attached to common
stock financing
• Credit standing of the
rim is enhanced with
the sale of common
stock
• There are times when
common stock is easier
to sell than debt
• Gives new shareholder
the right to share
control of corporation
• Has a dilutive effect on
the corporation’s
earnings per share and
price per share
• It is more expensive to
underwrite and
distribute common stock
than preferred stock
• The risk that investors
may perceive negatively
the issuance of common
stock resulting to a fall
in the price of the stock.
Preferred Stock
• Class of stock which has a claim on assets
before common stock, in the event that
the firm is dissolved; and it also has a
prior claim to dividends up to a specified
amount or rate.
Provisions of Preferred Stock
• Claim to Dividends
– Preferred stock has a basic advantage of prior
claim to dividends.
– Preferred stocks may be classified as: (1)
cumulative and (2) non-cumulative
• Cumulative – accumulates dividends even if it is not
paid for years. When dividends are declared, the
accumulated dividends are paid first before common
stockholders.
• Non-Cumulative - does not accumulate dividends.
When dividends are not declared for a given year,
the holders of non-cumulative preferred stocks may
not claim them later.
Provisions of Preferred Stock
• Voting Rights
– Preferred Stockholders, in general, do not
have the right to vote. The instances when
they may vote are:
• When the corporation proposes to issue a debt
security of a long-term nature or additional
preferred stock of equal standing with the
outstanding preferred stock
• When the corporation misses a dividend or fails to
pay a specified number accumulated dividends
Provisions of Preferred Stock
• Subscription Rights
– In case of additional issues of stock, some
preferred stockholders have the right to
subscribe, while others do not have the same
right. This right is called pre-emptive right.
• Callability
– Preferred stocks may be callable or noncallable. Callable preferred stocks are those
which may be bought back by the issuing
company at its option at a stated call price.
Provisions of Preferred Stock
• Convertibility
– Preferred stocks may be convertible or nonconvertible. Convertible preferred stocks are
those that can be converted into common
shares within a certain period after the
issuance of the preferred stock.
• Participation
– Preferred stocks may be participating or nonparticipating. Participating preferred stocks
participate or share with the common stock in
additional dividends after the preferred stock
has been credited with its regular dividend.
Provisions of Preferred Stock
• Classes
– Preferred stock may be issued in different
classes for different purposes. Privileges
afforded to some class of shares are sometimes
indicated to appeal to investors at the time of
issuance.
Advantages of Preferred Stock
Issue
• Claim of preferred stockholders on
corporate earnings is usually limited t a
specific amount or rate per share
• Preferred stockholders are owners and
they have no claim that can force the
corporation into bankruptcy proceedings
for non-payment of dividends
• Preferred stocks do not carry the burden
of retirement or repayment since they are
considered permanent financing.
Advantages of Preferred Stock
Issue
• Issuance of preferred stocks will not
jeopardize the existing controlling interest
of the common stockholders
• Various provisions which may be
incorporated in a preferred stock issue
make it a very flexible financing device
• Cost of capital raised is less than that of
common stock
• Preferred stock increases the leverage of
the common stockholders
Disadvantages of Preferred Stock
Issue
• Dividends are fixed payments and it
increases the financial risk of the firm
resulting to increases in the cost of all
financing
• Dividends are not deductible as a tax
expense, unlike the interest paid on debt.
Other Stock Features and their
Characteristics
• Treasury Stock
– One issued by the corporation, fully paid for,
reacquired by the corporation by purchase or
other means, and not cancelled.
– It carries no voting rights, nor the right to
dividends, and it is excluded from
computations concerned with capital stock.
– Treasury stocks may be sold for less than the
legal par value whenever circumstances
require.
Major use of treasury stock
consists of the following:
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Stock options
Acquisitions
Investments
Stock splits
Stock dividends
Conversion of convertible securities
including warrants
Corporate Bonds
Kinds of Bond
• Government Bonds
• Corporate Bonds
Bonds VS Stocks
• A bond is a debt instrument while stock is
an instrument of ownership
• Bondholders have a priority over
stockholders when payments are made by
the company
• Interest payments due to bonds are fixed,
while dividends to stockholders are
contingent upon earnings and must be
declared b the BOD
Bonds VS Stocks
• Bonds have specific maturity date, at
which time, repayment of the principal is
due. Stocks, on the other hand, are
instruments of permanent capital
financing and does not have maturity
dates
• Bondholders have no vote and no
influence on the management of the firm,
except when the provisions of the bonds
and the indenture agreement are not met
Alternative Ways of Bond Issuance
• Public Offering
• Private placement
Classes of Bonds
• As to type of security
• As to manner of participation in earnings
• As to method of retirement or repayment
Terms to remember
• Debentures – general credit bonds not
secured by specific property
• Mortgage Bonds – secured by a lien on
specifically named property such as land,
buildings, equipment and other fixed
assets
• Senior Liens – those having prior claim to
fixed assets pledged as security
• Junior Liens – those having subsequent
liens to fixed assets pledged as security
Terms to remember
• Assumed Bonds – all bonds (and/or
liabilities) previously issued by the
“deceased” corporation are assumed by
the surviving corporation. These bonds,
by virtue of such assumption, are referred
to as assumed bonds
• Guaranteed Bond – one in which the
payment of interest, or principal, or both,
is guaranteed by one or more individuals
or corporations.
Terms to remember
• Joint Bond – There are times when a
property is owned jointly by several
companies and the same property may be
used as security for a bond issue. The
companies bind themselves jointly as
debtors in this type of issue.
Terms to remember
• Coupon Bond – these are bonds having
attachments of a series of postdated
certificates (coupons) payable to the bearer
for the interest over the life of the bond.
• Registered Bond – A bond whose owner
is registered with the bond's issuer. The
owner's name and contact information is
recorded and kept on file with the company,
allowing it to pay the bond's coupon
payment to the appropriate person.
• Income Bond -
Terms to remember
• Income Bond – debt security in which
only the face value of the bond is
promised to be paid to the investor, with
any coupon payments being paid only if
the issuing company has enough earnings
to pay for the coupon payment.
• Participating Bond – stipulates a fixed
coupon rate but which also provide a
method of receiving additional income
over and above this minimum sum
Terms to remember
• Convertible Bond – generally debenture
bonds or junior-lien mortgage bonds
wherein the owner has options to
exchange his bond for a specified number
of shares of common stock, preferred
stock, or other types of bonds.
• Serial Bond – mature in instalments over
a period of time.
Bond issues consisting of a series of blocks
of securities maturing in sequence, the
coupon rate can be different.
Terms to remember
• Sinking Fund Bond – bonds that may be
gradually retired
• Callable Bond – bonds with provisions
that the terms of the issue can be
cancelled or “called”. This enables issuing
company to pay off a bond issue prior to
maturity.
Terms to remember
• Convertible Bond – May be exchanged for
the common stock of the issuing
corporation at a fixed price, at a predetermined redemption date, and at the
option of the bondholder.
• Perpetual Bond – Cannot be redeemed by
demanding repayment. It is primarily
suited in public finance where the debtor,
the government, may be assumed to have
a permanent existence.