Corporate Financing & Personal Investing

Terms for this chapter Bond Callable bond Common stock Convertible bond Cumulative preferred stock Diversification Dividends DJIA Interest Limit order Market order Maturity date Odd lots Preferred stock Round lots SEC Stockbroker Stock exchange Stock splits

Debt vs. Equity financing Debt = bonds Equity = stocks

Review/financing The use of one’s own personal funds to earn a financial return is called personal investment. An investment that is made in the hope of earning a fairly large profit in a short time span is called a speculative investment.

CORPORATE FUNDING Long-term vs. short-term financing – long term finances expansion sand mergers. Short-term – retailers for peak inventories Business funding – debt financing, sales of assets, sales revenue, equity capital (NOT government grants) Cash flow- the movement of money into and out of an organization Short-term financing – borrowed money that will be repaid in less than 12 mos.

Stocks and bonds used to meet long-term financial needs Not for small business Extensive disclosures by SEC

Stocks Stock Stock certificate Par value (assigned value) –No par stock –No reflection on market price –Used for calculating some state’s incorporation charges Dividend –Companies not required to pay dividends Form of equity financing

Common stocks Ownership Right to vote for board directors and important issues affecting the company Right to share in the firm’s profits through dividends Preemptive right – first right to purchase any new shares of common stock the firm decides to issue

Stock exchanges NYSE –Not every company’s stock can be bought or sold on the floor of the NYSE –$2.5 million for a seat on NYSE (1,366 members) in 1999 NASDAQ/OTC –In OTC market, the price a buyer is willing to pay is the ask price. AMEX

Selling Market value on stock is the current price for which it sells on the stock exchange on a specific day. To trade at a particular exchange, a brokerage firm must buy a seat with that exchange. A round lot is 100 shares Selling stock that an investor does not own but must replace later – selling short

Stocks - notes Voting rights at Board of directors meeting belong to common stockholders STOCK SPLITS –A stock split does not increase the value of the investor’s holdings DJIA has 30 stocks When investor sets a max price a broker can spend per share or minimum price to accept when selling stock – limit order

Preferred stocks Fixed dividends off par value –Do not have to be paid, though Callable - requires stockholders to sell back their shares Convertible stock – a feature that allows preferred stockholders to have the option to trade for a fixed number of shares of common stock Often cumulative

Preferred The type of preferred stock that shares in excess earnings along with common stockholders – participating. Preferred stockholders have no voting rights.

Bonds Interest - the charge for using money obtained from the sale of corporate bonds Form of debt-financing Investment bankers – assist with issue and sale of new securities, buy at discount Legal obligation: –Regular interest –Face value at maturity date

Bonds Coupon rate – clipped coupons to collect interest in past Risk rated by impendent firms – Standard and Poor’s and Moody’s Once Interest rate is set, cannot be changed Usually sold in multiples of $1000

Bonds Advantages: –No vote –Interest paid is tax-deductible –Temporary – once paid – debt eliminated Disadvantages: –Increases debt –Legal obligation –Must be repaid at later date

Bonds Secured vs. unsecured (collateral) Sinking fund – a reserve set aside to help with bonds being repaid Callable – issuer can pay off before maturity date (usually give more than face value but can reissue more at lower interest rate) Convertible – into shares of stock Riskier bonds – junk bonds

Preferred vs. bonds Both have a face value and a fixed rate of return Standard & Poor's and Moody’s Investor Service rates them both However: –Legal obligation to pay interest on bonds and repay face value – pfd dividends do not have to be paid legally and stock never has to be repurchased. Both increase in market value but stocks generally increase at higher percentages