Ice cream and restaurant. Opening new Frizzle’s around the world for the past five years.

2. Frizzle, Inc. • Ice cream and restaurant. • Opening new Frizzle’s around the world for the past five years. • One of the most popular ice cream restaurants in the United States and Europe. • 20% market share. • 25,000 employees in multiple locations in the United States and Europe. • Headquartered in New York, NY. • Looking to expand to China or Russia. • Needs $500 million in order to expand. • Financial statements indicate a healthy, profitable company.

3. Frizzle, Inc. Frizzle, Inc. has 3 choices to borrow money Frizzle, Inc. Borrow money from a bank Issue Stock Issue Bonds

4. Borrowing from a Bank Company can secure a loan from a bank in order to secure capital • Similar to an individual borrowing money • Must be paid back in a certain time by a specified date with interest

5. Borrowing from a Bank Advantages Disadvantages May be more expensive and have to pay a higher rate of interest Potential prepayment penalty Could decrease cash flow • May be able to secure loan quickly • Not giving up control • Can use money for anything

6. Issuing Stock (Equity) • What is stock? • Individual’s ownership in a corporation • Also known as Equity • Stockholders gain more ownership as they acquire more stock • The more stock a company issues, the less ownership they retain in the company Stockholders Company # of Stock Issued # of Stock Issued Ownership Ownership

7. Issuing Stock • Dividends • Portion of a company’s earnings distributed to their stockholders • When companies are secure and stable, they usually offer dividends to their stockholders • Issuer, or Frizzle, Inc., can elect not to pay the dividend, especially when they are in expansion mode • Timing and the amount of the dividends are uncertain

8. Issuing Stock • Liquidate • When a company sells all of their assets

9. Common Stock Ownership in a publicly traded company • Those who buy common stock have some control of the company • Elect a board of directors • Vote in annual meetings • Generally exercise control of the company

10. Common Stock Ownership in a publicly traded company • Bondholders and preferred stockholders have rights to the company’s assets before common shareholders • If a company liquidates, common stockholders are the last to get their investment back $ $ $ $ $ $ $ $ $ Liquidation of Company “X” Bondholders Preferred Stockholders Common Stockholders

11. Preferred Stock Equity in a corporation, to a limited degree • Little of no voice in the decisions of how a company should be managed • Get paid fixed dividends before any payment is made to the common stockholders • If a company liquidates, they are the first of the stockholders to get their money back • Company must pay the preferred stockholders their dividend first before common stockholders • Unlike common stockholders, preferred stockholders usually do not have voting rights

12. Issuing Stock • Stock Cash Flow Dividend Dividend Dividend Dividend Dividend Perpetuity 0 1 2 3 4 5 Perpetuity – A constant stream of identical cash flows with no end Year

13. Frizzle, Inc. • New Company that has never issued stock • IPO (Initial Public Offering) – Company sells stock for the first time • Company is valued • Frizzle is listed on an exchange (NASDAQ) • Investors are now able to buy Frizzle stock • Opening price is decided (per share)

14. Issuing Stock Advantages Disadvantages Company is giving up some control Company has to share ownership of company with other stockholders Stock dilution can occur from the issue of additional common shares by a company • Company can raise a lot of money from external investors • Company can use money to grow/expand • Company won’t have to borrow money from the bank and pay back at a high interest rate

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16. Bonds • What is a bond? • Form of debt issued by the Federal government, cities, states, and corporations • When an individual buys a bond from a company, they are essentially loaning money to that company • Lender/Bondholder – the individual buying the bond from the company • Issuer – The company or municipality borrowing the money

17. Bonds The issuer is repaying the lender’s/bondholder’s original investment(principal) and any interest (coupon payments) that is due at maturity

18. Bonds • Principal/Face Value:The original investment, face value, is repaid when the bond matures • Maturity Date:Predetermined date in the future when the bond matures and the lender/bondholder receives the principal investment plus interest • Coupon Rate (%):The interest that the lender/bondholder receives • Coupon Payment ($):A dollar amount that is paid to the lender/bondholder regularly until the bond matures (payment is based on the coupon rate and the principal)

19. Bonds Principal + Coupon Payment • Cash Flows of a Bond Coupon Payment Coupon Payment Coupon Payment Coupon Payment Maturity 0 1 2 3 4 5 Year

20. Bonds Credit riskis the chance that a bond issuer will fail to repay the principal and interest on the specified date Coupon Payment Coupon Payment Coupon Payment Coupon Payment 0 1 2 3 4 5 Year

21. Maturity Date • Bonds • Face Value (Par) • Coupon Rate • Coupon Payment

22. Issuing a Bond Advantages Disadvantages Company may have difficulty issuing bonds if they are experiencing financial difficulties within their company Company may not be large enough to issue bonds • Company can raise money for expansion • Interest on bonds are deductible on a corporation's income tax return • Company can borrow at a lower interest rate than they would have to pay the bank

23. Role of an Investment Bank Assists a company in facilitating the process by: • Advising companies on financing alternatives raising capital • Managing the issuance of bonds and stocks • Helping the company determine the characteristics of the stock or bond offering (Example: the maturity of a bond) • Determining the price of the stock or bond - For stock, the price per share; for a bond, the coupon rate • Determining the opening price at which. For example, Frizzle, Inc. will sell its IPO. • Assessing the issuer for a credit rating if a bond is issued • Underwriting the security offering – the investment bank buys the stocks and bonds from the issuers and then distributes them into the marketplace

24. Rating Process For Bonds • Major ratings agencies are: • Ratings are based on whether or not the issuer will be able to make their principal and interest payments, to the bond holder, on time A “AAA” high grade bond offers more security but a lower yield than a “C” bond A “C” bond is more risky but has a higher yield

26. Frizzle, Inc. As an executive of Frizzle, Inc., which option would you choose? Frizzle, Inc. Borrow money from a bank Issue Stock Issue Bonds