Types of Securities

1. Types of Securities • Equity • Common stock • Preferred stock • Debt • Commercial paper • Debentures (bonds) • Notes (loans) • Bank financing (line of credit; term loan) • Hybrid • Convertible Debt

2. Common Stock Authorized Stock Number of shares of common stock that can be issued by the company Issued Shares Shares that have been issued by the company. Outstanding Shares Shares that have been issued by the company and are currently held by investors. (Note: treasury stock is shares that were issued and repurchased)

3. Issuance of Shares Requires approval of board of directors and shareholders. Par Value Value of security shown on certificate. Note: may be none Common Stock Authorized Shares Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.

4. Common Stock Book Value of Equity: Par value + Capital paid in excess of par Retained Earnings Treasury Stock Book Value vs. Market Value Book value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. The market value of the firm is forward looking, it depends on the future value that shareholders expect to receive.

5. Common Stock Example - H.J. Heinz Book Value vs. Market Value (4/2004) Total Shares outstanding = 352 million

6. Common Stock Example - H.J. Heinz Book Value vs. Market Value (4/2004) Total Shares outstanding = 352 million

7. Preferred Stock Preferred Stock - Stock that takes priority over common stock in regards to dividends and liquidation. Dividends - Can be skipped at board’s discretion. Not a legal obligation that can lead to bankruptcy. Cumulative v. Noncumulative Floating-Rate Preferred - Preferred stock paying dividends that vary with short term interest rates.

8. Corporate Debt • Nonrecourse Debt – If corporation does not pay its debt, the shareholders do not have to put extra money into the corporation. Instead, the debtholders put company in bankruptcy and take over the assets. • “Default Risk” - describes the likelihood that a corporation will not be able to pay its obligations. • “Bond Ratings” - are issued on debt instruments to help investors assess the default risk of a firm.

9. Corporate Debt Prime Rate - Benchmark interest rate charged by banks. Line of Credit – Loan where amount borrowed varies through life of loan. Callable Bond - Bond that may be repurchased by firm before maturity at specified call price. Sinking Fund - Fund established to retire bond before maturity.

10. Corporate Debt Subordinated Debt - Debt that may be repaid in bankruptcy only after senior debt is repaid. Secured Debt - Debt that has first claim on specified collateral (i.e., assets) in the event of default. Investment Grade - Bonds rated Baa or above by Moody’s or BBB or above by S&P. Junk Bond - Bond with a rating below Baa or BBB.

11. Corporate Debt Eurodollars - Dollars held on deposit in a bank outside the United States. Eurobond - Bond that is marketed internationally. Private Placement - Sale of securities to a limited number of investors without a public offering. Protective Covenants - Restriction on a firm to protect bondholders. Lease - Long-term rental agreement. Is this debt?

12. Convertible Securities Warrant - Right to buy shares from a company at a stipulated price before a set date. This is an option, but not a requirement, to buy shares. Convertible Bond - Bond that the holder may exchange for a specified amount of equity. Convertibles are a combined security, consisting of a bond and an option, but not a requirement, to convert.

13. Patterns of Corporate Financing • Firms may raise funds from external sources or plow back profits rather than distribute them to shareholders. • Should a firm elect external financing, they may choose between debt or equity sources.

14. Sources of Funds

15. Patterns of Corporate Financing