1. Corporate Stocks by Mrs. Belen Apostol afinan1 1st sem 11 - 12

2. Corporate Stocks
Long term capital requirements involve accumulation of values or fixed assets.
Primary sources of long-term financing:
Sale of stocks
Sale of bonds

3. Stock Financing
refers to shares of stock sold to raise funds for long-term financing requirements
Its objective is to increase equity capital
e.g. Public utility firms, finance expansion through stock financing. (PLDT)
Advantage
does not burden the company with pressure of redeeming the stocks at a given date.
does not have maturity periods
non-interest bearing
does not require collaterals

4. Capital stock, Dividends, & Retained Earnings
Capital stock – interest of the owners of a corporation.
Issued stocks – portion of the authorized stock which has been issued.
Unissued stocks – not yet issued
Dividends – the net income distributed to the owners.
Retained earnings- retained profits not declared as dividends.

5. Classes of Corporate Stocks
Common Stock
Preferred Stock
Common Stock – represents the real equity capital.
- has a residual claim (after debts have been paid) to earnings and assets which carries the risk of business success or failure.

6. Varieties of Common Stock
Classified common stock
Deferred stock
Voting trust certificate
Guaranteed stock
Debenture stock

7. Varieties of Common Stock
Classified Common Stock - common stock may be classified to suit various requirements of the issuing firm and investors.
Deferred Stock – minor type of issue which entitles the holder to receive dividends, and in the event of dissolution, assets, after the common stockholders have been paid.
- normally issued to founders promoters or managers as bonus for their efforts in getting the corporation started.

8. Varieties of Common Stock
3. Voting Trust Certificates – given to trustees of a corporation when activities are entrusted to them. - certificates provide the trustee the power to vote. - made to make certain that the voting power remains in certain hands for a period of time.

9. Varieties of Common Stock
4. Guaranteed Stocks – stocks wherein the payment of dividends is guaranteed by another corporation. - arise when a corporation purchases or leases the property of another. - a holding company may also guarantee the stock issue of one of its smaller subsidiaries to make the issue more attractive in the market.

10. Varieties of Common Stock
4. Debenture Stock – fixed-interest securities issued by limited companies in return for long-term loans.
- redemption date falls between 10 – 40 years from the date of issue
- Types:
Fixed debentures
Floating debentures

11. Debenture Stock Fixed debentures – secured by specific assets
Floating debentures – secured by a charge on the assets of the firm.
Interest on debentures must be paid whether the company makes a profit or not.
In the event of liquidation, debenture holders rank ahead of all shareholders in their claims on the company’s assets
Convertible debenture – carries an option at a fixed future date to convert the stock into common shares at a fixed price.

12. Common Stock Advantages of Common Stock Financing
afinan1 1st sem
Common Stock
Advantages of Common Stock Financing
It does not entail fixed charges – dividends are paid only when profits are realized by the company.
There is no fixed maturity date attached to common stock financing
The firm’s credit standing is enhanced with the sale of common stock –losses are absorbed first by the common stock
There are times when common stock is easier to sell than debt.
by: Mrs. Belen Apostol

13. Common Stock Disadvantages of Common Stock Financing
It gives new shareholders the right to share control of the corporation.
It has a dilutive effect on the corporation’s earnings per share and price per share
It is more expensive to underwrite and distribute common stock than preferred stock
There is a risk that investors may perceive negatively the issuance of common stock resulting to a fall in the price of the stock.

14. afinan1 1st sem
Preferred Stock
A stock which has a claim on assets before common stock
- it has a prior claim to dividends up to a specified amount or rate.
- it is a permanent investment for the company
also called preferred shares, preference shares
Preferreds are senior (i.e., higher ranking) to common stock, but are subordinate to bonds
Preferred stock usually carries no voting rights,but may carry a dividend and may have priority over common stock in the payment of dividends and upon liquidation. Preferred stock may have a convertibility feature into common stock.
by: Mrs. Belen Apostol

15. Preferred Stock Provisions of Preferred Stock: 1. Claim to dividends
afinan1 1st sem
Preferred Stock
Provisions of Preferred Stock:
1. Claim to dividends
2. voting rights
3. subscription rights
4. callability
5. convertability
6. participation
7. classes
The following features are usually associated with preferred stock:
Preference in dividends.
Preference in assets in the event of liquidation.
Convertible into common stock.
Callable at the option of the corporation.
Nonvoting.
by: Mrs. Belen Apostol

16. afinan1 1st sem
Preferred Stock
Claim to Dividends – preferred stockholders are entitled to a fixed dividend before common stockholders receive their dividends.
Classification:
1. cumulative
2. non-cumulative
In general, preferreds have preference to dividends payments. A preference does not assure the payment of dividends, but the company must pay the stated dividend rate prior to paying any dividends on common stock.
Preferred stock can either be cumulative or noncumulative. A cumulative preferred requires that if a company fails to pay any dividend or any amount below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period, which can be quarterly, semi-annually, or annually. When a dividend is not paid in time, it has "passed" and all passed dividends on a cumulative stock is a dividend in arrears.
by: Mrs. Belen Apostol

17. Preferred Stock Claim to Dividends
afinan1 1st sem
Preferred Stock
Claim to Dividends
Cumulative Preferred Stock – accumulates dividends even if it is not paid for years. Accumulated dividends must be paid first before paying any common stockholder
Non-cumulative Preferred Stock – does not accumulate dividends.
Cumulative preferred stock—If the dividend is not paid, it will accumulate for future payment.
Non-cumulative preferred stock—Dividend for this type of preferred stock will not accumulate if it is unpaid.
by: Mrs. Belen Apostol

18. afinan1 1st sem
Preferred Stock
Voting Rights – Preferred stockholders, do not have the right to vote.
Preferred stockholders vote if:
The corporation proposes to issue a debt security of a long-term nature or additional preferred stock of equal standing with the outstanding preferred stock.
The corporation misses a dividend or fails to pay a specified number of accumulated dividends, the preferred stockholders can participate in the annual election of the directors
Some preferred shares have special voting rights to approve certain extraordinary events (such as the issuance of new shares or the approval of the acquisition of the company) or to elect directors, but most preferred shares provide no voting rights associated with them. Some preferred shares only gain voting rights when the preferred dividends are in arrears for a substantial time.
by: Mrs. Belen Apostol

19. Preferred Stock
Subscription Rights – preferred stockholders have the right to subscribe additional issues of stock. (pre-emptive right)
Two forms:
1. those with pre-emptive right; and
2. those without pre-emptive right

20. Preferred Stock Callability
afinan1 1st sem
Preferred Stock
Callability
Preferred Stocks may also be classified as:
Callable – those which may be bought back by the issuing corporation at its option, but at a stated call price.
Non callable
all provision,enabling the issuing corporation to repurchase the share at its (usually limited) discretion.
by: Mrs. Belen Apostol

21. afinan1 1st sem
Preferred Stock
Convertibility – they can be converted into common shares within a certain period after the issuance of the preferred stock.
Preferred stock may be convertible; or non- convertible
Convertible Preferred Stock—These are preferred issues that the holders can exchange for a predetermined number of the company's common stock. This exchange can occur at any time the investor chooses regardless of the current market price of the common stock. It is a one way deal so one cannot convert the common stock back to preferred stock.
by: Mrs. Belen Apostol

22. afinan1 1st sem
Preferred Stock
Participation – participating or sharing with common stock in additional dividends after the preferred stock has been credited with its regular dividends.
Preferred stock may either be participating or non-participating
Classes- preferred stock may also be issued in different classes for different purposes.
Participating Preferred Stock—These preferred issues offer the holders the opportunity to receive extra dividends if the company achieves some predetermined financial goals. The investors who purchased these stocks receive their regular dividend regardless of how well or how poorly the company performs, assuming the company does well enough to make the annual dividend payments. If the company achieves predetermined sales, earnings or profitability goals, the investors receive an additional dividend.
by: Mrs. Belen Apostol

23. Preferred Stock Advantages of the Preferred Stock Issue
The claim of preferred stockholders on corporate earnings is usually limited to a specific amount of rate per share
Preferred stockholders are owners and they have no claim into bankruptcy proceedings for non-payment of dividends.
Preferred stock do not carry the burden of retirement of repayment since they are considered permanent financing.
The issuance of preferred stocks will not jeopardize the existing controlling interest of the common stockholders.

24. Preferred Stock Advantages of the Preferred Stock Issue
5. The various provisions which may be incorporated in a preferred stock issue make it a very flexible financing device.
6. The cost of capital raised by preferred stock is less than that of common stock
7. Preferred stock increases the leverage of the common stockholders.

25. Preferred Stock Disadvantages of the Preferred Stock Issue
Dividends are fixed payments and it increases the financial risk of the firm resulting to increases in the cost of all financing
Dividends are not deductible as a tax expense, unlike interest paid on debt

26. Other Stock Features & their characteristics
afinan1 1st sem
Other Stock Features & their characteristics
There are other stock features and characteristics which aim to satisfy the requirements of either the investor or the issuing company.
Treasury Stock - one issued by the corporation, fully paid for, reacquired by the corporation by purchase or other means, and not cancelled. It carries no voting rights, nor the right to dividends and excluded from the computations concerned with capital stock. It may be sold less than the legal par value whenever circumstances require
Treasury stock - reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).
Treasury stock does not pay a dividend Treasury stock has no voting rights
The possession of treasury shares does not give the company the right to vote, to exercise pre-emptive rights as a shareholder, to receive cash dividends, or to receive assets on company liquidation. Treasury shares are essentially the same as unissued capital and no one advocates classifying unissued share capital as an asset on the balance sheet
by: Mrs. Belen Apostol

27. Treasury Stock
The major use of treasury stock consists of the following:
Stock options
Acquisitions
Investments
Stock splits
Stock dividends; and
Conversion of convertible securities including warrants.

28. Stock Options
A right given by the corporation allowing an individual at his option to buy a certain number of shares of, usually common stock, from the company within a certain time period.
Treasury stocks may be sold to holders of stock options.
Treasury stock losses its identity and becomes common stock, with all its rights and attributes.

29. Acquisitions, Investments, stock split
afinan1 1st sem
Acquisitions, Investments, stock split
Happens when a large firm takes control of a small firm.
Investment – purchase of an asset or undertaking for any commitment, which involves an initial sacrifice followed by subsequent benefits.
Stock split- an issue of new shares to stockholders without increasing total capital. It reduces the average quoted price of shares to promote their marketability
A stock split or stock divide increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.
for example, a company with 100 shares of stock priced at $50 per share. The market capitalization is 100 × $50, or $5000. The company splits its stock 2-for-1. There are now 200 shares of stock and each shareholder holds twice as many shares. The price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before the split.
by: Mrs. Belen Apostol

30. Stock Dividends, Convertible Securities, Warrants
afinan1 1st sem
Stock Dividends, Convertible Securities, Warrants
Stock Dividends – dividends paid in the company’s own stock, including treasury stock.
Convertible Securities – refer to preferred stock or bonds with option to convert into common stock.
Warrants- an option or right exercisable by its holder, to purchase stock at a stated price during a stipulated period of time.
A dividend payment made in the form of additional shares, rather than a cash payout.
by: Mrs. Belen Apostol

31. afinan1 1st sem
Par Value Stock
Par value – stated value in the shares of corporate stock
Par value stock – a stock with a stated value
The par value of a share of stock is equal to the minimum price, specified in the corporate charter, at which it may be sold in order for the stock to be fully paid and be non-assessable.
Importance of par value:
It establishes the amount due the preferred stockholders in the event of liquidation
The preferred dividend is frequently stated as a percentage of the par value
means stated value or face value.
par value is a nominal value of a security which is determined by an issuing company as a minimum price.
No-par value stock prices are determined by what investors are willing to pay for them in the market.
by: Mrs. Belen Apostol

32. No Par value stocks, Book Value Stock
afinan1 1st sem
No Par value stocks, Book Value Stock
No Par value stocks - those shares of stock without a face or nominal value. Dividends are expressed in peso amounts rather than percentage
Book Value – stated value of a stock based on the accounting concepts of recorded value as reflected in the balance sheet.
book value or carrying value is the value of an asset according to its balance sheet account balance.
Stock that is issued without the specification of a par value indicated in the company's articles of incorporation or on the stock certificate itself.
by: Mrs. Belen Apostol

33. Market Value of stock, Economic Value of a stock
afinan1 1st sem
Market Value of stock, Economic Value of a stock
Market value – value placed at any one time on a stock traded in a stock exchange or over the counter, or even between parties in an encumbered transaction without duress.
Economic Value – value of a stock as reflected by its current and future earnings power, plus any potential recovery of all or part of the investment.
is an estimate of a firm's economic profit
Market value is the price at which an asset would trade in a competitive auction setting
by: Mrs. Belen Apostol