Chapter 7 Finance

7-1 Types of Equity
7-1a Preferred Stock (pg.109-110) Preferred stock is often referred to as a hybrid security b/c it is similar to bonds (debt) in some respects but similar to common stock in other respects. ~The characteristics of preferred stock fall between debt and common stock. ~Examples showing comparisons are on pg.109.
Par Value (pg.109): Most preferred stock has a par value or its equivalent under some other name, such as liquidation value or liquidation preference. The par value is important for 2 reasons:1.) it establishes the amount due to the preferred stockholders in the event the firm is liquidated2.) the preferred dividend generally is stated as a percentage of the par value
Cumulative Dividends (pg.109) A protective feature on preferred stock that requires preferred dividends previously not paid to be disbursed before any common stock dividends can be paid.
Maturity (pg.109) No specific maturity date but can incorporate a maturity proviso by including a call provision with the preferred stock.
Priority to Assets and Earnings (pg.109) Preferred stockholders have priority over common stockholders, but not debt holders, with regard to earnings and assets. ~Thus, dividends must be paid on preferred stock before they can be paid on common stock, and, in the event of bankruptcy, the claims of the preferred stockholders must be satisfied before the common stockholders receive anything.
Control of the Firm (Voting Rights) (pg.109) Nearly all preferred stock is nonvoting stock, which means that preferred stockholders neither elect the members of the board of directors nor vote on corporate issues. ~However, preferred stockholders often are given the right to vote for directors if the company does not pay the preferred dividend for a specified period, such as two years.
Convertibility (pg.109-110) Most preferred stock that has been issued in recent years is convertible into common stock. ~The preferred stockholder has the option to convert each share of preferred stock into a certain number of shares of common stock (at the conversion price).
Other Provisions (pg.110) Other provisions occasionally found in preferred stocks include the following:1.) Call Provision:A call provisions gives the issuing corporation the right to call in the preferred stock for redemption. ~Call Premium=The amount in excess of par value that company must pay when it calls a security.2.) Sinking Fund:Most newly issed preferred stocks have sinking funds that call for the repurchase and retirement of a given percentage of the preferred stock each year.3.) Participating:A rare type of preferred stock is one that participates with common stock in sharing the firm’s earnings.Participating preferred stocks generally work as follows:a.) the stated preferred dividend is paid— for example $5 per shareb.) The common stock is then entitled to a dividend in an amount up to the preferred dividendc.) If the common dividend is raised, say, to $5.50, the preferred dividend must likewise to be raised to $5.50.
7-1b Common Stock (pg.110-112) We usually refer to common stockholders as the owners of the firm, b/c investors in common stock have certain rights and privileges generally associated with property ownership. ~Common stockholders are entitled to any earnings that remain after interest payments are made to bondholders and dividends are paid to preferred stockholders. -B/c debt and preferred stock are generally fixed-payment securities, common stockholders do not have to share earnings that exceed the amounts that the firm is required to pay to these shareholders.
Par Value (pg.110) In many cases, common stock doe snot have a par value. ~However, corporations that are charted in certain states are required to assign par values to their common stocks. -Legally, the par value of a common stock reprints a stockholder’s minimum financial obligation in the vent the corporation is liquidated and its debts are repaid. Example is written in the textbook (pg.110)The par value and market value of a common stock are not related— that is, par value does not determine market value, and vice versa.
Dividends (pg.110) The firm has no obligation, contractual or implied, to pay common stock dividends. Some firms pay relatively constant dividends year after year; other companies do not pay dividends for many years after they go public.
-Income Stocks (pg.110) Stocks of firms that traditionally pay large, relatively constant dividends each year.
-Growth Stocks (pg.110) Stocks that generally pay little or no dividends so as to retain earnings to help fund growth opportunities.
Maturity (pg.110-111) Like preferred stock, common stock has no specified maturity that iso it is perpetual (never ending or changing).Stock repurchases might be undertaken when1.) the firm has excess cash but no good investment opportunities2.) the price of the firm’s stock is undervalued; or3.) management wants to gain more ownership control of the firmly repurchasing stock from other investors, thereby increasing the percentage owned by management..
Priority to Assets and Earnings (pg.111) Common stockholders can be paid dividends only after interest on debt and preferred dividends are paid. ~Are last to receive any of the proceeds from liquidation ~Are last in line to receive any cash distributions from corporation.
Control of the Firm (Voting Rights) (pg.111) The common stockholders have the right to elect the form’s directors, who in turn appoint the officers who manage the business. ~Stockholders also vote on shareholders’ proposals, mergers, and changes in the firm’s charter. Each share of stock normally has one vote, so the owner of 1,000 shares has 1,000 votes.
-Proxy (pg.111) A document giving one person the authority to act for another; typically it gives them the power to vote shares of common stock.
Preemptive Right (pg.111-112) A provision (condition) that gives existing common stockholders the right to purchase new issues of common stock on a pro rata basis before any shares can be offered to other investors.The Purpose:1.) It protects the power of control of current stockholders. ~If not for this safeguard, the management team of a corporation could prevent the stockholders from removing the managers form the office by issuing a large number of additional shares and purchasing these shares themselves.2.) Protects stockholders against the dilution of value that would occur if new shares were sold at relatively low prices.
Types of Common Stock (pg.112)
-Classified Stock (pg.112) Common stock that is given a special designation, such as Class A, Class B, and so forth, to meet special needs of the company.
-Founders’ Shares (pg.112) Stock, owned by the firm’s founders, that has sole voting rights but generally pays out only restricted dividends (if any) for a specified number of years.Note that “Class A,” “Class B,” and so on have no standard meanings. One firm could designate its Class B shares as founders’ shares and its Class A shares as those sold the public, whereas another firm might reverse these designations.

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