Raising Money to
Grow a Business
Lesson 2
Issuing Stock
How Companies Expand
Aim:
 What are the pros and cons of issuing
stock?
Do Now:
 What would be the pros and cons of
having a rich retired relative invest a lot
in your business and receive half
ownership in return?
How Companies Expand
 Do Now answers:
1. Pro: You now have a significant
amount of money to grow the
business.
2. Con: Your rich relative is now
officially an equal owner to you. He or
she may not agree with you how to
best run the business.
Frizzle, Inc.
 Ice cream and restaurant.
 Opening new Frizzle’s around the world for the past five
years.
 One of the most popular ice cream restaurants in the
United States and Europe.
 20% market share.
 25,000 employees in multiple locations in the United States
and Europe.
 Headquartered in New York, NY.
 Looking to expand to China or Russia.
 Needs $500 million in order to expand.
 Financial statements indicate a healthy, profitable company.
Issuing Stock (aka Equity)
 What is (common) stock?
 An investment representing ownership
 Each unit is known as a share. Stockholders gain more
ownership as they buy more shares
 The more stock a company issues, the less ownership
percentage the founders will retain
 Easy to buy shares once a company “goes public” (ie:
sells its shares to the outsiders for the first time)
Stockholders
Shares
of stock
Cash
Company
Cash
Shares
of stock
Benefits of Owning Stock
1. As mentioned earlier, the right to
vote for members of the Board of
Directors
2. The right to receive dividends
(discussed next) if the Board
believes the company can afford to
pay them.
3. Of course, to profit if the share
price goes up!
Issuing Stock
 Dividends
 Portion of company profit distributed to
stockholders because its not needed
 When companies are secure and
stable, they usually pay dividends
 Board of Issuer, or Frizzle, Inc., can
elect not to pay dividends, especially
when it is in expansion mode
 Timing and the amount of the
dividends are uncertain, although once
a company begins paying a dividend, it
likes to continue paying it
Issuing Stock
 Stock Cash Flow
Dividend
0
Dividend
1
Dividend
2
Dividend
3
Dividend
4
5
Perpetuity
Year
Perpetuity – A constant stream of identical
cash flows with no end
Issuing Stock
 Stock Cash Flow (continued)
 Dividends may be received in perpetuity (ie:
never end) because stock does not have an
expiration date!
 Because there’s no end, the company doesn’t
ever pay the shareholder back for his or her
stock.
 When the shareholder no longer wants to
own it, he or she sells it to another investor
to receive the “final cash flow”, so to speak.
Downsides of Owning Stock
 If a company fails and must sell (ie: liquidate) its
assets, common stockholders are the last to
get their investment back.
$ $of$Company “X”
$ $ Liquidation
$
$ $ $
 Bondholders and those who have loaned the company
money are entitled to be paid back everything before
common shareholders get anything!
 Common stockholders are also known as “residual”
owners, because they only get what’s left after all debts
have been paid!
Issuing Stock
 Liquidate
 When a company sells all of its assets in the
process of going out of business.
 It tries to get as much as possible so it can
pay back its investors
Issuing Stock (vs. Borrowing)
Advantages
Disadvantages
 Company can raise a lot of
money from external
investors
 Money does not have to be
paid back
 Company won’t have to
borrow money from the
bank and pay back at a high
interest rate
 Founders are giving up
some control by sharing
ownership of company (and
the right to profits) with
other stockholders
 This effect is called dilution
because the founders’
ownership is watered down
with each new share sold
to other investors
The Best of Both Worlds?
 Common stock and Bonds have their
advantages and disadvantages from the both
the issuer’s side and the investor’s side.
What to do?
 Create an investment that has some of the
traists of common stock and some of bonds
 Because it takes from both, it’s known as a
hybrid security
 Its name is Preferred Stock
 While every publicly traded company has
common stock, most do not offer preferred
stock
Preferred Stock
Equity in a corporation, to a limited degree
 Little or no voice in the decisions of how a company
should be managed because there are no voting rights
 Get paid fixed dividends that will not increase even if
company profits are increasing and the common stock
dividend has been increased
 Company must pay the preferred stockholders their
dividend first before common stockholders
 If a company liquidates, they are the first of the
stockholders to get their money back
The Complete Liquidation
Payback Order
Liquidation of Company “X” that has
previously issued bonds, preferred stock
$ $ stock $ $ $
$ $ $ and$common
1st
Bondholders
2nd
Preferred
Stockholders
3rd
Stockholders
Lesson Summary 1 of 2
1. What is another name for ownership? (Hint:
begins with E)
2. What do we call a unit of ownership?
3. What do we call the first time a company
issues stock to outside investors?
4. What are the major benefits of owning stock?
5. What do we call the effect of ownership being
watered down as a company raises money
by issuing new shares to the investing
public?
Lesson Summary 2 of 2
6. What do company founders risks when
the company sells new shares to the
investing public?
7. What do we call the selling of assets
as part of going out of business?
8. What type of investment has traits of
both common stock and bonds?
9. What are the pros and cons of issuing
stock?
Web Challenge #1
• Challenge: Research three companies
that are planning to go public. Answer:
– How long have they been in business?
– Are they currently making profits?
– Which investment bank is in charge of
the Initial Public Offering (IPO)?
– How much money does the company
intend to raise?
Web Challenge #2
Q: How much can an investor benefit from
receiving dividends?
•
A: A lot! Some companies pay sizable
dividends when compared to the price of the
stock (which is what investors must pay for
the right to receive the dividend).
•
Challenge: Search using “dividend growers” or
“rising dividends” for three companies that have
raised their dividends year after year. How
much have they risen? Which company holds
the record for most consecutive increases?
Web Challenge #3
• Challenge: Some company founders
are very interested in raising money
and also keeping control of their
businesses. Two such companies are
Facebook and Google. Research what
each company did when issuing
shares and raising money to ensure
that the founders would retain control!