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.

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. Terms to remember

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 Deferred stock Voting trust certificate Guaranteed stock Debenture stock

Advantages 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 Disadvantages 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