Chapter Nine Corporate Financial Structure

Corporate Finances: Key Terms  Security: a share, participation, or other interest in property or an enterprise of the issuer or an obligation of the issuer share  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 Slide 1 of 2

Corporate Finances: Key Terms  Bondholder: one to whom a debt is owed by a corporation  Dividend: a distribution of corporate profits Slide 2 of 2

Types of Stock  Common Stock:  Common Stock: Ordinary stock of a corporation having no special privileges  Preferred Stock:  Preferred Stock: Stock in a corporation that carries certain rights and privileges

Comparison of Common and Preferred Stock Common StockPreferred Stock Voting RightsUsually one vote per share Voting rights may or 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 Common Stock Preferred Stock Liquidation RightsShareholders receive assets after distribution to creditors and then preferred shareholders Shareholders receive assets after creditors and before common shareholders Conversion RightsNo conversion rightsShareholders may have right to convert their preferred shares into some other type of shares

Comparison of Common and Preferred Stock Common StockPreferred Stock Redemption Rights No redemption rights Shareholders may be forced to sell their stock back to corporation or to compel corporation to purchase their stock at agreed- upon 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, shareholders receive assets after outside creditors/bondholders In event of liquidation, bondholders receive assets before shareholders

Key Features of Corporate Finances Slide 1 of 4  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.

Key Features of Corporate Finances Slide 2 of 4  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.

Key Features of Corporate Finances Slide 3 of 4  “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.

Key Features of Corporate Finances Slide 4 of 4  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.