 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. Frizzle, Inc.

Borrow money from a bank Issue Stock Issue Bonds Frizzle, Inc. Frizzle, Inc. has 3 choices to borrow money

 Similar to an individual borrowing money  Must be paid back in a certain time by a specified date with interest Borrowing from a Bank Company can secure a loan from a bank in order to secure capital

Advantages  May be able to secure loan quickly  Not giving up control  Can use money for anything Disadvantages  May be more expensive and have to pay a higher rate of interest  Potential prepayment penalty  Could decrease cash flow Borrowing from a Bank

 What is stock?  Individual’s ownership in a corporation  Also known as Equity  Stockholders gain more ownership as they acquire more stock  The more stock a company issues, the less ownership they retain in the company Issuing Stock (Equity) StockholdersCompany # of StockIssued StockIssued Ownership Ownership

 Dividends  Portion of a company’s earnings distributed to their stockholders  When companies are secure and stable, they usually offer dividends to their stockholders  Issuer, or Frizzle, Inc., can elect not to pay the dividend, especially when they are in expansion mode  Timing and the amount of the dividends are uncertain Issuing Stock

 Liquidate  When a company sells all of their assets Issuing Stock

 Those who buy common stock have some control of the company Common Stock Ownership in a publicly traded company  Elect a board of directors  Vote in annual meetings  Generally exercise control of the company

$$$ $$$ $$$  If a company liquidates, common stockholders are the last to get their investment back Common Stock Ownership in a publicly traded company  Bondholders and preferred stockholders have rights to the company’s assets before common shareholders Liquidation of Company “X” BondholdersBondholdersPreferredStockholdersPreferredStockholdersCommonStockholdersCommonStockholders

 Little of no voice in the decisions of how a company should be managed  Get paid fixed dividends before any payment is made to the common stockholders  If a company liquidates, they are the first of the stockholders to get their money back  Company must pay the preferred stockholders their dividend first before common stockholders  Unlike common stockholders, preferred stockholders usually do not have voting rights Preferred Stock Equity in a corporation, to a limited degree

Issuing Stock  Stock Cash Flow Year PerpetuityPerpetuity Dividend Perpetuity – A constant stream of identical cash flows with no end

New Company that has never issued stock IPO (Initial Public Offering) – Company sells stock for the first time Company is valued Opening price is decided (per share) Investors are now able to buy Frizzle stock Frizzle is listed on an exchange (NASDAQ) Frizzle, Inc.

Advantages  Company can raise a lot of money from external investors  Company can use money to grow/expand  Company won’t have to borrow money from the bank and pay back at a high interest rate Disadvantages  Company is giving up some control  Company has to share ownership of company with other stockholders  Stock dilution can occur from the issue of additional common shares by a company Issuing Stock

 What is a bond?  Form of debt issued by the Federal government, cities, states, and corporations  When an individual buys a bond from a company, they are essentially loaning money to that company Bonds  Lender/Bondholder – the individual buying the bond from the company  Issuer – The company or municipality borrowing the money Lender Lends Money Issuer Receives Interest & Principal

Bonds Lender Lends Money Issuer Receives Interest & Principal The issuer is repaying the lender’s/bondholder’s original investment (principal) and any interest (coupon payments) that is due at maturity

Bonds  Principal/Face Value: The original investment, face value, is repaid when the bond matures  Maturity Date: Predetermined date in the future when the bond matures and the lender/bondholder receives the principal investment plus interest  Coupon Rate (%): The interest that the lender/bondholder receives  Coupon Payment ($): A dollar amount that is paid to the lender/bondholder regularly until the bond matures (payment is based on the coupon rate and the principal)

Principal + Coupon Payment Bonds  Cash Flows of a Bond Coupon Payment Coupon Payment Coupon Payment Coupon Payment Year MaturityMaturity

Bonds Coupon Payment Coupon Payment Coupon Payment Coupon Payment Year Credit risk is the chance that a bond issuer will fail to repay the principal and interest on the specified date

Bonds Maturity Date Coupon Rate Face Value (Par) Coupon Payment

Advantages  Company can raise money for expansion  Interest on bonds are deductible on a corporation's income tax return  Company can borrow at a lower interest rate than they would have to pay the bank Disadvantages  Company may have difficulty issuing bonds if they are experiencing financial difficulties within their company  Company may not be large enough to issue bonds Issuing a Bond

Assists a company in facilitating the process by:  Advising companies on financing alternatives raising capital  Managing the issuance of bonds and stocks  Helping the company determine the characteristics of the stock or bond offering (Example: the maturity of a bond)  Determining the price of the stock or bond - For stock, the price per share; for a bond, the coupon rate  Determining the opening price at which. For example, Frizzle, Inc. will sell its IPO.  Assessing the issuer for a credit rating if a bond is issued  Underwriting the security offering – the investment bank buys the stocks and bonds from the issuers and then distributes them into the marketplace Role of an Investment Bank

 Major ratings agencies are: Rating Process For Bonds A “AAA” high grade bond offers more security but a lower yield than a “C” bond A “C” bond is more risky but has a higher yield  Ratings are based on whether or not the issuer will be able to make their principal and interest payments, to the bond holder, on time

CREDIT RATINGS* MOODY’SSTANDARD & POOR’SFITCH INVESTMENT GRADE STRONGEST AaaAAA AaAA AAA BaaBBB NON-INVESTMENT GRADE WEAKEST BaBB BBB CaaCCC CaCC CCC CDD *These credit ratings are reflective of obligations with long-term maturities.

Borrow money from a bank Issue Stock Issue Bonds Frizzle, Inc. As an executive of Frizzle, Inc., which option would you choose?