FIN 614: Financial Management Larry Schrenk, Instructor

1.Equity Basics 2.Equity Markets 3.Pros and Cons of Equity 4.Financing Comparison Note: Preferred Shares Later

Rights Ownership Entitled to Distributed Earnings (Dividends) Entitled to Share of Assets Residual Claimant Status Interest Paid First Absolute Priority Rule

Public Exchanges (Physical or Electronic) OTC Trading of Unlisted Stocks & Listed Stocks Direct Trading

Price Decline Expected $100 → $90 Strategy t = 0 Borrow $100 Share and Sell It Cash: $100; Liability: Replace Share t = 1 Buy $90 Share and Replace Share Cash: $10; Liability: None

Stock Represents Ownership Ownership Implies Control Stockholders Elect Directors Directors Hire Management Managers Maximize Stock Price Recall Agency Problems

7 70% Owned by Institutional Investors Institutional Investors Include: Pension Plan Funds Insurance Companies Mutual Funds Hedge Funds

8 No Obligation to Pay Dividends Risk Averse Management Doesn’t Like Debt Reduces Financial Risk

9 Dilution Ownership Lower Earnings per Share More Difficult than Debt Offering Flotation costs More Expensive

Common Equity Preferred Shares Debt OwnershipYesNo PriorityLowMediumHigh Required CFNoConditionalYes MaturityNoOftenYes RiskHighMediumLow

FIN 614: Financial Management Larry Schrenk, Instructor