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BF CHAPTER 8

Chapter 8 of the document discusses corporate stocks as a primary source of long-term financing, highlighting the advantages and disadvantages of stock financing compared to bonds. It details the types of corporate stocks, including common and preferred stocks, their characteristics, and implications for investors and companies. Additionally, it explains key concepts such as treasury stock, par value stock, and the different values associated with stocks.

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21 views

BF CHAPTER 8

Chapter 8 of the document discusses corporate stocks as a primary source of long-term financing, highlighting the advantages and disadvantages of stock financing compared to bonds. It details the types of corporate stocks, including common and preferred stocks, their characteristics, and implications for investors and companies. Additionally, it explains key concepts such as treasury stock, par value stock, and the different values associated with stocks.

Uploaded by

subukan.ko.din
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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BUSINESS FINANCE

CHAPTER 8
CORPORATE STOCKS

There two primary sources of long term financing: a. the sale of stocks and b. bonds.

Stock Financing – it is the activity when shares of stock are sold to raise funds for the long term financing
requirements of the firm.

The advantage of stock financing

Raising long term capital through stock financing does not burden the company with pressure of redeeming the
stocks at a given date. This is because stocks, unlike bonds have no maturity periods. As such, these funds may be
used continually without the burden of renewals which are inherent to the other sources of long-term financing.
Furthermore, common stocks are not interest bearing and the issuance of stocks does not require collaterals.

Capital stock – the interest of the owners of a corporation.


Issued stock – it is a portion of the authorized stock which has been issued and sold.
Unissued stock – those which are not yet issued capital stock.
Dividends – the net income of a corporation that are distributed to the stockholders.
Retained Earnings – income of a corporation that are retained in the company’s coffers for use in some of its
capital financing requirements. It increases the actual and the market value of the company’s shares of stock.

Classes of Corporate Stocks


A. Common Stock – is that class of stock issued by all corporations and which represents the real equity
capital.

Varieties of common stock:


a. Classified common stock – common stock may be classified to suit various requirements of the issuing
firm and investors
b. Deferred Stock – is a 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. This type of stock is
generally issued to founders, promoters or managers as a bonus for their efforts in getting the
corporation started.
c. Voting Trust Certificates – are those which are given to trustees of a corporation when the activities
of the corporation are entrusted to them.
d. Guaranteed Stocks – refer to stocks of a corporation wherein the payment of dividends is guaranteed
by another corporation.
e. Debenture Stock – is not a stock in the real sense, but a debt issue similar to debenture bonds. They
are fixed-interest securities issued by limited companies in return for long-term loans.
Advantages of Common Stock Financing:
a. It does not entail fixed charges.
b. There is no fixed maturity date attached to common stock financing.
c. The firm’s credit standing is enhanced with the sale of common stock.
d. There are times when common stock is easier to sell than debt.

Disadvantages of Common Stock Financing:


a. It gives new shareholders the right to share control of the corporation.
b. It has a dilutive effect on the corporation’s earnings per share and price per share.
c. It is more expensive to underwrite and distribute common stock than preferred stock or debt.
d. There is a risk that investors may perceive negatively the issuance of common stock resulting to a fall
in the price of the stock.
B. Preferred Stock – is that class of stock which has a claim on assets before common stock, in the event that
the firm is dissolved; and it also has a prior claim to dividends up to a specified amount or rate.

Provisions of Preferred Stock (Distinctions)


1. Claim to dividends – has a basic advantage prior to claim dividends, they are entitled to a fixed
dividend before common stockholders. It can be cumulative and noncumulative.
2. Voting rights – in general, do not have the right to vote, but there are instances when they can vote.
3. Subscription Rights – in case of additional issues of stock, some preferred stockholders have the right
to subscribe, while others do not have the same right.
4. Callability – preferred stocks may also be classified as either callable or non-callable.
5. Convertibility – some may also have the feature of convertibility, they can be converted into
commons shares within a certain period after the issuance of the preferred stock.
6. Participation – preferred stocks may also have the additional feature of participating or sharing with
the common stock in additional dividends after the preferred stock has been credited with its regular
dividend.

Advantages of the Preferred Stock Issue: (point of view of management)


a. The claim of preferred stockholders on corporate earnings is usually limited to a specific amount or
rate per share.
b. Preferred stocks do not carry the burden of retirement or repayment since they are considered
permanent financing.
c. The cost of capital raised by preferred stock is less than that of common stock.

Disadvantages of the Preferred Stock Issue:


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

Treasury Stock – is one issued by the corporation, fully paid for, reacquired by the corporation by purchase or
other means, and not cancelled.

Par Value Stock – is the stated value in the shares of corporate stock.

No Par Value Stock – are those shares of stock, without a face or nominal value.

Book Value of Stock – refers to the stated value of a stock based on the accounting concepts of recorded value as
reflected in the balance sheet.

Market Value of Stock – is the 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 of Stock – refers to the value of a stock as reflected by its current and future earning power, plus
any potential recovery of all or part of the investment.

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