r e e n common and preferred stock financing · r e e ncommon and preferred stock financing...
TRANSCRIPT
C H
A P
T E
R
S E V E N T E E N
Common andPreferred StockFinancing
McGraw-Hill Ryerson ©McGraw-Hill Ryerson Limited 2000
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Figure 17-1Time line during rights offering
PPT 17-1
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Beforetax and aftertax yields on corporate debentures andpreferred shares
Beforetax debenture yield . . . . . . . . . . . . . 5.34 percent
Federal tax (29%) . . . . . . . . . . . . . . . . . . . (1.55)
Provincial tax (44% of federal tax) . . . . . (0.68)
Aftertax debenture yield . . . . . . . . . . . . . . 3.11 percent
Beforetax preferred yield . . . . . . . . . . . . . . 4.50 percent
Gross up (25%) . . . . . . . . . . . . . . . . . . . . . . 5.63
Federal tax (29% of grossed-up amount) . 1.63
Tax credit (13 1/3% of grossed-up amount) .75
Net federal tax . . . . . . . . . . . . . . . . . . . . . . . (0.88)
Provincial tax (44% of federal tax) . . . . . . (0.39)
Aftertax preferred yield . . . . . . . . . . . . . . . . 3.23 percent
PPT 17-2
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
CommonStock
Belongs to commonshareholders throughvoting rights andresidual claim to income
None
Lowest claim of anysecurity holder
Highest
PreferredStock
Limited rights whendividends are missed
Must receive paymentbefore commonshareholder
Bondholders andcreditors must besatisfied first
Moderate
BondsLimited rightsunder default ininterest payments
Contractualobligation
Highest claim
Lowest
1. Ownershipand controlof the firm
2. Obligationto providereturn
3. Claim toassets inbankruptcy
4. Cost ofdistribution
PPT17-3
Table 17-1aFeatures of alternative security issues
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
CommonStock
Highest risk, highestreturn (at least intheory)
Not deductible
Dividend to anothercorporation is usuallytax exempt
Special tax treatment with dividend tax credit
PreferredStock
Moderate risk,moderate return
Not deductible
Same as commonstock
BondsLowest risk,moderate return
Tax deductibleCost = Interestpayment ××××(1 – Tax rate)
Interest usuallyfully taxable
5. Risk-returntrade-off
6. Tax status ofpayment bycorporation
7. Tax status ofpayment torecipient
PPT17-3
Table 17-1bFeatures of alternative security issues
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Required rate of return
Savings account
Treasury bills (short term)
Long-term government securities
Secured debt
Senior unsecured debt
Subordinated debentures
Common stock
Corporate issues
Risk to investor
PPT17-4
Figure 17-2Risk and expected return for various security classes
•Preferred stock
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Chapter 17 - Outline LT 17-1
• Common Stock
• The Voting Right
• Rights Offering
• “Rights-on” and “Ex-rights”
• Poison Pill
• Preferred Stock
• Provisions Associated with Preferred Stock
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Common Stock LT 17-2
• Common shareholders own the corporation and have ultimate control
• They have a residual (leftover) claim to all corporate income that is notpaid out to others
• Common shareholders have the right to vote on all major issues,including election of the board of directors
• Practically, management controls the corporation on a daily basis
• Management is most sensitive to the holders of large blocks of shares,
– such as the founding family, mutual funds, pension funds,insurance companies, trust companies
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
The Voting Right LT 17-3
Proxy:
– a right to vote given to someone else’s (absentshareholder’s) vote
Majority Voting:
– all directors must be elected by at least 51% of the vote
– doesn’t allow minority shareholders representation onthe board of directors
Cumulative Voting:
– a shareholder’s votes can all be used to elect 1 person
– allows minority shareholders representation on board
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Rights Offering LT 17-4
Rights Offering:
– gives current shareholders a first option to purchasenew shares (called a preemptive right provision)
– allows existing shareholders the same amount of controlthey have initially
– shareholder receives 1 right for each share of stockowned
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
“Rights-on” and “Ex-rights” LT 17-5
“Rights-on”
– if you buy the stock, you will also acquire a righttoward a future purchase of the stock
– occurs when a rights offering is initially announced
“Ex-rights”
– when you buy the stock you no longer get a righttoward future purchase of the stock
– occurs after a certain period of time
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Poison Pill LT 17-6
Poison Pill:
– a rights offering made to existing shareholders of acompany in order to make it more difficult for anothercompany to acquire it
– allows existing shareholders the right to buy additionalshares of the stock at a very low price
– makes hostile takeovers very expensive and unattractive
– often introduced by management to protect their owninterests
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Preferred Stock LT 17-7
Preferred Stock:
– a hybrid security combining characteristics of both debtand common stock
– has a fixed dividend that must be paid before dividendson common stock
– dividends are not tax deductible to a company
– provides the company with a balance in its capitalstructure
– primary purchasers are corporate investors, insurancecompanies, and pension funds
th5
©McGraw-Hill Ryerson Limited 2000
Foundations of FinancialManagement CANADIAN
E D I T I O N
FIF
T H
McGraw-Hill Ryerson
BlockHirt
Short
Provisions Associated withPreferred Stock LT 17-8
Cumulative Dividends:
– if not paid in one year, dividends accumulate and mustbe paid in total before common shareholders
Conversion Feature:
– preferred stock may be converted into common stock atthe option of the holder
Call Feature:
– company has option to redeem stock
Retractable Feature:
– investor has option to redeem stock
Floating Rate Dividend:
– company adjusts dividend to market conditions