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Chapter 13 Introduction to Corporate Financing and Governance.docx

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York University
FINE 2000

13.2 COMMON STOCK - Issued shares: shares that have been issued by the company - Outstanding shares: shares that have been issued by the company and are held by investors - Authorized share capital: maximum number of shares that the company is permitted to issue as specified in the firm’s articles of incorporation - Par Value: value of security shown on certificate - It was an arbitrary set number and almost always lower than the actual sale price of the new shares, but today common shares mostly do not have a par value - Addition paid-in capital: Difference between issue price and par value of stock, also called capital surplus/contributed surplus/paid-in surplus - Retained earnings: earnings not paid out as dividends - Foreign currency translation adjustments can sometimes translate to losses due to currency conversion - Net common equity= common shares + retained earnings + foreign currency translation adjustment gains - Equals the total amount contributed directly by common shareholders when the firm issued new stock, and indirectly when it plowed back part of its earnings - Treasury stock is stock is bought back - Not allowed in Canada - Common shares account is reduced by the average issue price. Any amount in excess of the average issue price is subtracted from retained earnings, or sometimes from paid-in surplus account Book Value Versus Market Value - Book value is a backward-looking measure. Tells how much capital firm has raised from shareholders in the past. Does not measure the value that investors place on those shares today - Market value is forward-looking. Depends on the future dividends that shareholders expect to receive - Market value is usually greater than book value - Inflation has driven up value of assets from their original cost - Firms raise capital to incest in projects with PVs that exceed initial cost Dividends - Shareholders hope to receive series of dividends however the company is not obliged to pay any dividends Ownership of the Corporation - Common shareholders own a corp. - Insurance companies, trusteed pension plan, mutual funds, and banks also have sizeable estimates - Shareholders are entitled to whatever profits are left over - Have control over company’s affairs - Vote on appointments of the board of directors - Board of directors consists of company’s top management as well as non-executive directors (not employed by the firm) Voting Procedures - Majority voting: Voting system in which each director is voted on separately - Cumulative voting: voting system in which all the votes one shareholder is allowed to can be cast for one candidate for the board of directors - “Supermajority” vote requires two-thirds to 80% of all shareholders’ votes - Usually needed to approve a merger - Makes it difficult for the firm to be taken over and therefore helps to protect the incumbent management - Proxy contests: Takeover attempt in which outsiders compete with - In special situations involving corporate decisions, the votes of the most of the minority shareholders must be received Classes of Stock - Common shares without full voting rights are called restricted shares - Non-voting  restricted shares that have no votes - Subordinate voting  restricted shares that have fewer votes per share than another class of common shares - Limited voting shares also carry fewer voting rights - Stock exchanges will not list a new class of non-voting or subordinate voting shares unless the shares have the right to participate in takeover - This right is called a coattail provision Corporate Governance in Canada and Elsewhere - Separation between ownership and management in major Canadian corporations creates potential conflict between shareholders and managers - Mechanisms to mitigate this problem (discussed in Chapter 1) only work if there is sufficient transparency within the corporation - Scandals, like Enron, have led U.S. Congress to pass Sarbanes-Oxley Act, which aims to ensure that companies and their accountants provide directors, lenders, and shareholders with information they need to monitor progress - Act set up Public Company Accounting Oversight Board to oversee auditors - Ontario recently introduced “Canada’s Sarbanes-Oxley” - Regulations provide for healthy and ethical business environment - In Japan, industrial and financial companies are linked together in a group called keiretsu - Managers may sit on the board of directors - Each company holds shares in many of the other companies - Companies generally borrow from keiretsu’s bank or from elsewhere within the group - The more stable and concentrated shareholder base of large Japanese corporations makes it easier for them to resist pressures for short-term performance - In South Korea, you have chaebols - In other countries, he stock market is less important and control shifts to major shareholders, typically banks and other companies 13.3 PREFERRED STOCK - Preferred stock: stock that takes priority over common stock in regards to dividends - Net worth: Book value of common shareholders’ equity plus preferred stock - For most companies preferred stock is much less important than common stock, but it can be a useful method of financing during mergers and other special situations - Promises a series of fixed payments - Legally an equity security - No dividends can be paid on common stock until preferred dividend has been paid - If company goes out of business, preferred shareholders have right to money after debtors - Shares are cumulative -
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