Corporate Stocks by Mrs. Belen Apostol

1. Corporate Stocks by Mrs. Belen Apostol

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. Common Stock • 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 • 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.

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. 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

15. Preferred Stock • Provisions of Preferred Stock: 1. Claim to dividends 2. voting rights 3. subscription rights 4. callability 5. convertability 6. participation 7. classes

16. 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

17. 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.

18. 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

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 • 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

21. 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

22. 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.

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 • 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

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 • 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

30. 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.

31. 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

32. 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.

33. 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.