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