33:390:400 Lecture Notes - Lecture 2: Share Repurchase, Preferred Stock, Shares Outstanding
11 May 2018
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Chapter 15: Long-Term Financing
15.1: Some Features of Common and Preferred Stocks
Authorized Shares: Number of shares stated in the articles of incorporation
Treasury Stock: Issued shares that aren’t outstanding (the company owns them; stock buyback)
Book Equity = (Cap. Surplus) + (Par Value) + (Retained Earnings) – (Cost of Treasury Shares)
Common Stock: Stock that has no special preference in receiving dividends or in bankruptcy
- One share, one vote (voting rights)
- Right to share proportionally in dividends
- Right to share proportionally in assets remaining after liabilities have been paid in
liquidation
- “Preemptive right”: Forces a company to sell stock to current shareholders before the
public
- Not all companies do this
Cumulative Voting: All votes are cast at the same time
- All directors are elected at once
- Allows minority participation
- If open spots, one share entitles you to 5 votes
- Can assign all votes to one person; advantageous for individual investors
Straight Voting: Directors are elected one at a time
- “Freezes out” minority shareholders
- If 5 directors are up for election, one share entitles you to vote for 5 individuals
Proxy Voting: Granting the right of authority by a shareholder to someone to vote their shares
Classes of Stock:
Dual-Class Stocks: Two classes of stocks with differential voting rights
- Class A Stock: Usually held by the public
- Class B Stock: Usually held by company insiders
- Usually weighed differently so even though their may be less of Class B shares,
they might still have more voting power than a Class A shareholder
Dividends: Payout to shareholders from company earnings
- Not required to pay dvd → not a liability → nonpayment doesn’t mean bankruptcy
- Not tax deductible
- Individual shareholders pay taxes on dividends
- Corporations can exclude 70% of dividends from taxes
find more resources at oneclass.com
find more resources at oneclass.com
Preferred Stock Features:
- Has preference over common stock in payment of dvd and in bankruptcy liquidation
- Typically have no voting rights, but usually get voting rights if not dividend is paid
- Fixed dividend price
- Preferred stock usually have no maturity date (a perpetuity)
- Preferred dividends are not tax deductible
- Corporations who receive preferred dividends pay tax on only 30% of the dividend
Cumulative Preferred Stock: If a company misses a dvd payment, cumulative P/S holders will
receive the missed payment, then their current payment before C/S holders get anything
- “Dividends in arrears”
Noncumulative Preferred Stock: No arrearage. Still preferred, but don’t receive missed
payment
- Preferred Stock looks a lot like debt
15.2: Corporate Long-Term Debt
Debt Securities (notes, debentures, bonds) – An IOU
- Have to pay regular interest payments per period, and also pay back principal
- Owning bonds does not give you ownership in the company!
- Companies are liable to make all interest payments and principal payment on time
- If missed, bondholders can take legal recourse – liquidation/bankruptcy
- Interest payments made by a corporation are tax deductible
Short-term debt: less than a year - unfunded debt
Long-term debt: More than a year
Secured Debt: Something is held up as collateral if firm cannot pay back money owed
Unsecured Debt: No collateral
Notes – Matures in less than 10 years
Bonds – Matures in more than 10 years
Indenture: Written, legal agreement between the borrower and the creditors; the deed of trust
Principal value, face value (FV in calc): Original value of the bond, usually $1,000
YTM: Yield to maturity, the interest rate
Coupon: The amount being paid each period (PMT)
Present Value: 0
N: Number of years until maturity
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
If open spots, one share entitles you to 5 votes. Can assign all votes to one person; advantageous for individual investors. If 5 directors are up for election, one share entitles you to vote for 5 individuals. Right to share proportionally in assets remaining after liabilities have been paid in liquidation. Preemptive right : forces a company to sell stock to current shareholders before the public. 15. 1: some features of common and preferred stocks. Authorized shares: number of shares stated in the articles of incorporation. Treasury stock: issued shares that aren"t outstanding (the company owns them; stock buyback) Surplus) + (par value) + (retained earnings) (cost of treasury shares) Common stock: stock that has no special preference in receiving dividends or in bankruptcy. Cumulative voting: all votes are cast at the same time. Straight voting: directors are elected one at a time. Proxy voting: granting the right of authority by a shareholder to someone to vote their shares.
