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.

Terms to remember 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.

Classes of Corporate Stocks Common Stock Preferred Stock

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 Multiple-category stock divided usually into two classes on the basis of its benefits. Class A is a non-voting, dividend paying stock issued to public. Class B is voting stock that pays no dividend but appreciates with the growth of the firm. (businessdictionary.com)

Varieties of Common Stock Deferred Stock A minor type of issue which entitles the holder to receive dividends, and in the event of dissolution, assets, after the common stockholders have been paid. This type of stock is generally issued to founders,

Varieties of Common Stock Classified common stock Deferred stock Voting trust certificate Guaranteed stock Debenture stock

Advantages Disadvantages 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 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 Preferred Stockholders, in general, do not have the right to vote. The instances when they may vote are: When the corporation proposes to issue a debt security of a long-term nature or additional preferred stock of equal standing with the outstanding preferred stock When the corporation misses a dividend or fails to pay a specified number accumulated dividends

Provisions of Preferred Stock Subscription Rights In case of additional issues of stock, some preferred stockholders have the right to subscribe, while others do not have the same right. This right is called pre-emptive right. Callability Preferred stocks may be callable or non-callable. Callable preferred stocks are those which may be bought back by the issuing company at its option at a stated call price.

Provisions of Preferred Stock Convertibility Preferred stocks may be convertible or non-convertible. Convertible preferred stocks are those that can be converted into common shares within a certain period after the issuance of the preferred stock. Participation Preferred stocks may be participating or non-participating. Participating preferred stocks participate or share with the common stock in additional dividends after the preferred stock has been credited with its regular dividend.

Provisions of Preferred Stock Classes Preferred stock may be issued in different classes for different purposes. Privileges afforded to some class of shares are sometimes indicated to appeal to investors at the time of issuance.

Advantages of Preferred Stock Issue Claim of preferred stockholders on corporate earnings is usually limited t a specific amount or rate per share Preferred stockholders are owners and they have no claim that can force the corporation into bankruptcy proceedings for non-payment of dividends Preferred stocks do not carry the burden of retirement or repayment since they are considered permanent financing.

Advantages of Preferred Stock Issue Issuance of preferred stocks will not jeopardize the existing controlling interest of the common stockholders Various provisions which may be incorporated in a preferred stock issue make it a very flexible financing device Cost of capital raised is less than that of common stock Preferred stock increases the leverage of the common stockholders

Disadvantages of Preferred Stock Issue Dividends are fixed payments and it increases the financial risk of the firm resulting to increases in the cost of all financing Dividends are not deductible as a tax expense, unlike the interest paid on debt.

Other Stock Features and their Characteristics Treasury Stock One issued by the corporation, fully paid for, reacquired by the corporation by purchase or other means, and not cancelled. It carries no voting rights, nor the right to dividends, and it is excluded from computations concerned with capital stock. Treasury stocks may be sold for less than the legal par value whenever circumstances require.

Major use of treasury stock consists of the following: Stock options Acquisitions Investments Stock splits Stock dividends Conversion of convertible securities including warrants

Corporate Bonds

Kinds of Bond Government Bonds Corporate Bonds

Bonds VS Stocks A bond is a debt instrument while stock is an instrument of ownership Bondholders have a priority over stockholders when payments are made by the company Interest payments due to bonds are fixed, while dividends to stockholders are contingent upon earnings and must be declared b the BOD

Bonds VS Stocks Bonds have specific maturity date, at which time, repayment of the principal is due. Stocks, on the other hand, are instruments of permanent capital financing and does not have maturity dates Bondholders have no vote and no influence on the management of the firm, except when the provisions of the bonds and the indenture agreement are not met

Alternative Ways of Bond Issuance Public Offering Private placement

Classes of Bonds As to type of security As to manner of participation in earnings As to method of retirement or repayment

Terms to remember Debentures – general credit bonds not secured by specific property Mortgage Bonds – secured by a lien on specifically named property such as land, buildings, equipment and other fixed assets Senior Liens – those having prior claim to fixed assets pledged as security Junior Liens – those having subsequent liens to fixed assets pledged as security

Terms to remember Assumed Bonds – all bonds (and/or liabilities) previously issued by the “deceased” corporation are assumed by the surviving corporation. These bonds, by virtue of such assumption, are referred to as assumed bonds Guaranteed Bond – one in which the payment of interest, or principal, or both, is guaranteed by one or more individuals or corporations.

Terms to remember Joint Bond – There are times when a property is owned jointly by several companies and the same property may be used as security for a bond issue. The companies bind themselves jointly as debtors in this type of issue.

Terms to remember Coupon Bond – these are bonds having attachments of a series of postdated certificates (coupons) payable to the bearer for the interest over the life of the bond. Registered Bond – A bond whose owner is registered with the bond's issuer. The owner's name and contact information is recorded and kept on file with the company, allowing it to pay the bond's coupon payment to the appropriate person. Income Bond -

Terms to remember Income Bond – debt security in which only the face value of the bond is promised to be paid to the investor, with any coupon payments being paid only if the issuing company has enough earnings to pay for the coupon payment. Participating Bond – stipulates a fixed coupon rate but which also provide a method of receiving additional income over and above this minimum sum

Terms to remember Convertible Bond – generally debenture bonds or junior-lien mortgage bonds wherein the owner has options to exchange his bond for a specified number of shares of common stock, preferred stock, or other types of bonds. Serial Bond – mature in instalments over a period of time. Bond issues consisting of a series of blocks of securities maturing in sequence, the coupon rate can be different.

Terms to remember Sinking Fund Bond – bonds that may be gradually retired Callable Bond – bonds with provisions that the terms of the issue can be cancelled or “called”. This enables issuing company to pay off a bond issue prior to maturity.

Terms to remember Convertible Bond – May be exchanged for the common stock of the issuing corporation at a fixed price, at a pre-determined redemption date, and at the option of the bondholder. Perpetual Bond – Cannot be redeemed by demanding repayment. It is primarily suited in public finance where the debtor, the government, may be assumed to have a permanent existence.