Chapter Nine
Corporate Financial Structure
Corporate Finances: Key Terms
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Security: a share, participation, or other interest in
property or an enterprise of the issuer or an obligation
of the issuer
Equity Security: a security representing ownership
interest in an enterprise (often called a share)
Equity Capital: capital received by a corporation in
return for issuance of stock
Debt Security: a security representing an obligation of
the corporate issuer (often called a bond)
Debt Capital: money received by a corporation in
return for issuing debt securities
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Corporate Finances: Key Terms
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Bondholder: one to whom a debt is owed by a
corporation
Dividend: a distribution of corporate profits
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Types of Stock
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Common Stock: Ordinary stock of a corporation
having no special privileges
Preferred Stock: Stock in a corporation that carries
certain rights and privileges
Comparison of Common and
Preferred Stock
Common Stock
Preferred Stock
Voting Rights
Usually one vote per Voting rights may or
share
may not exists;
articles will specify
Distribution
Rights
No right to
distributions;
distributions
declared in
discretion of board
and corporation
must be solvent
Distributions may be
cumulative.
Shareholders may
have participating
preferred stock.
Comparison of Common and
Preferred Stock
Liquidation Rights
Common
Stock
Preferred
Stock
Shareholders receive
assets after
distribution to
creditors and then
preferred
shareholders
Shareholders receive
assets after creditors
and before common
shareholders
Conversion Rights No conversion rights
Shareholders may
have right to convert
their preferred shares
into some other type
of shares
Comparison of Common and
Preferred Stock
Redemption
Rights
Common Stock
Preferred Stock
No redemption
rights
Shareholders may
be forced to sell their
stock back to
corporation or to
compel corporation
to purchase their
stock at agreedupon price
Comparison of Equity and Debt
Securities
Equity Securities
(“Stock”)
Debt Securities
(“Bonds)
Shareholder is an owner of the
corporation and is entitled to
vote and receive distributions, if
earnings permit
Bondholder is an outside creditor
of the corporation and is entitled
to timely repayment of the debt
Issuance of shares produces
cash for the corporation
Issuance of bonds produces cash
for the corporation
Issuance of shares dilutes power
of existing shareholders but
costs the corporation nothing
Issuance of bonds does not dilute
owner of existing shareholders
but bonds must be repaid
Comparison of Equity and Debt
Securities
Equity Securities
(“Stock”)
Debt Securities
(“Bonds)
If corporation is insolvent, no
distributions will be paid to any
shareholder
Bondholder may be entitled to
periodic payments of interest and
principal whether or not the
corporation is solvent
Corporation may not deduct
distributions paid to
shareholders
Corporation may deduct interest
paid to bondholders and reduce
taxable income
In the event of liquidation,
In event of liquidation,
shareholders receive assets after bondholders receive assets
outside creditors/bondholders
before shareholders
Key Features of Corporate Finances
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To raise money, corporations will issue stock (equity
securities), which show ownership interest in the
corporation or bonds (debt securities), which are loans
to the corporation.
Shares issued by a corporation must be authorized by
the articles.
The par value of a share is the lowest price for which
it can be sold.
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Key Features of Corporate Finances
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If stock has no par value, it can be sold for whatever
amount the directors determine is in the best interest
of the corporation.
Corporations may have more than one class of stock.
“Common” stock is ordinary stock of the corporation
and usually has voting rights, distribution rights, and
liquidation rights.
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Key Features of Corporate Finances
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“Preferred” stock has some sort of right or preference
other classes do not have, often as to cumulating
dividends, conversion, or redemption.
Debt securities may be secured by real estate or
personal property; in the event of a default the
creditor can recover the property pledged as security
or collateral.
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Key Features of Corporate Finances
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Debt securities may have favorable redemption terms
or conversion terms.
Corporations are said to be subject to “double
taxation”; the corporation pays tax on money it
earns, and shareholders then pay tax on distributions
made to them. Interest paid on bonds is a deductible
expense for a corporation.
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