Corporations (Finance) Flashcards
Corporations (Finance)
Capital Structure
A corporation’s capital structure refers to the particular mix of debt and equity that the business uses to finance its operations and plans for future growth.
Corporations (Finance)
Initial Capital:
Sources
- Contributions from Founders
- Issuing Stock/Securities Offerings
- Borrowing Money
a. From Banks
b. From the Public at Large (Capital Markets)
Corporations (Finance)
Authorized Stock
The maximum number of shares the company may issue, per the articles of incorporation
Corporations (Finance)
Issued Stock
- Shares that have been transferred to shareholders in exchange for consideration
AND - All treasury stock
Corporations (Finance)
Outstanding Stock
Shares that have been issued to shareholders, not including treasury stock
Only Outstanding Shares are eligible to vote at shareholder meetings
Dividends are issued to holders of outstanding stock
Corporations (Finance)
Shareholders
Investors who make an equity investment in a corporate that is represented by shares of stock
Shareholders hold authorized, issued, and outstanding shares
Corporations (Finance)
Treasury Stock
Stock held by the corporation
Treasury stock is authorized and issued, but it is not outstanding
Corporations may reacquire/repurchase authorized, issued, and outstanding stocks, restoring them to the status of authorized, but not issued or outstanding.
Corporations (Finance)
Par Value Stock:
Effect of “No Par Value” Stated
If no par value is stated, the board can allocate to stated capital and capital surplus at its discretion
Corporations (Finance)
Par Value Stock:
Stated Capital Account
The par value amount goes to the stated capital account
Corporations (Finance)
Par Value Stock:
Capital Surplus Account
Any amount over the par value amount goes to the capital surplus account
Corporations (Finance)
Par Value Stock:
Watered Down/Discount/Bonus Stock
Stock that is issued below par value
Corporations (Finance)
Common Stock:
Stockholder Rights
The default class of stock
- Voting Rights
- Distribution Rights
- Liquidation Rights
- Preemptive Rights (maybe)
Corporations (Finance)
Common Stock:
Stockholder Voting Rights
Common stock has full, unlimited voting rights for directors and for approving certain fundamental changes to the business
Typically one-stock-one-vote, but sometimes fractional
If there are different classes of stock, certain voting rights may be altered
Directors may be voted for using straight or cumulative voting
Corporations (Finance)
Voting for Directors:
Straight Voting
Each stockholder is entitled to vote based on on-stock-one vote per each director position
May require a majority or plurality to win
Corporations (Finance)
Voting for Directors:
Cumulative Voting
Each stockholder is entitled to vote based on the number of stocks held multiplied by the number of open director position
They may apply their votes to one or more open director positions
Only requires a plurality to win
Corporations (Finance)
Common Stock:
Shareholder Distribution Rights
Common stockholders receive distributions based on their overall percentage of shares
Corporations (Finance)
Common Stock:
Stockholder Liquidation Rights
Common stockholders are entitled to residual assets on liquidation only if and after the corporation has satisfied all other debts and obligations
Common stockholders are paid only if and after preferred stockholders liquidation rights have been satisfied
Corporations (Finance)
Preferred Stock
Rights
Preferred stock has preference over common stock, meaning preferred stockholders are paid first upon distribution and/or liquidation
1. Voting Rights
2. Distribution Rights
a. Dividend Preferences
.
.
b. Cumulative v. Noncumulative Stock
.
Cumulative Stock is accumulated year over year when the corporation has not issued distributions
.
Noncumulative Stock does not accumulate, the preferred stockholder only recieves their preference when distributions are made
.
c. Participating v. Nonparticipating Stock
.
Participating Stock receives both the common stock distribution and the preferred stock distribution
.
Nonparticipating Stock only receives the preferred stock distribution
.
.
3. Liquidation Preference
4. Redemption Preference
5. Conversion Rights
Corporations (Finance)
Preferred Stock:
Voting Rights
Dictated by the specific terms of the class of stock
Preferred stockholders may have special, limited, or no voting rights
Corporations (Finance)
Preferred Stock:
Distribution Rights
Dividend Preference
Preferred stockholders are generally entitled to receive distributions before common stockholders
Corporations (Finance)
Preferred Stock:
Types of Redemption Preferences
- Call/Callable Shares
- Put/Right of Redemption
Corporations (Finance)
Preferred Stock:
Redemption Preferences
Call/Callable Shares
Stock is callable if the corporation has the authority to reacquire/callback all or a portion of the shares from the shareholders, at the board’s discretion
The amount to be paid is governed by the articles of incorporation
Corporations (Finance)
Preferred Stock:
Redemption Preferences
Sinking Fund
To ensure sufficient funds to repurchase the redeemable preferred stock, the corporation usually establishes a separate account, called the sinking fund
The corporation deposits funds into the sinking fund overtime for redemption purposes.
The fund cannot be used for other purposes
Corporations (Finance)
Preferred Stock:
Redemption Preferences
Put/Right of Redemption
A stockholder may have the right to compel the corporation to redeem/buy back their shares
Requirements
1. There must be sufficient funds in the sinking fund
2. It must be in accordance with the articles of incorporation
Corporations (Finance)
Preferred Stock:
Conversion Rights
Preferred stockholders may have the right to convert their preferred stock into cash, indebtedness, or another class/series of shares at an agreed-on price ratio
If the right exists, the corporation must have an adequate number of authorized, unissued shares to allow preferred shareholders to exercise this right
Commonly coupled with anti-dilution provisions
Corporations (Finance)
Debt Financing:
Benefits
Corporation, Shareholder, & Creditor Benefits
Corporation & Shareholder Benefits
1. Retain Ownership
2. Retain Enhanced Value
Creditor Benefits
1. Reliance
2. Preference over equity holders
3. If secured, ability to recover via specific collateral property
Corporations (Finance)
Debt Financing:
Detriments
Corporation, Stockholder, & Creditor Detriments
Corporation & Shareholder Detriments
1. Burden of Regular Payments regardless of profits
a. Risk of Default
b. Risk of Acceleration
c. Ability/Inability to Cure
2. Unfavorable Terms
3. Possible Involuntary Bankruptcy Petitions by Creditors
4. Reduced Company Appeal to potential investors
Creditor Detriments
1. No Possibility of Enhanced Value Gains
2. Risk of Debtor Bankruptcy, even if the debt is secured
Corporations (Finance)
Primary Types of Debt Financing
- Loans/Promissory Notes
- Bonds
- “Zero-Coupon” Bonds
- “Junk” Bonds
- Debenture
- Line of Credit
- Accounts Payable
Corporations (Finance)
Debt Financing:
“Zero Coupon” Bond
A bond with zero interest payments due until the end of the term
Corporations (Finance)
Debt Financing:
“Junk” Bond
A bond with a below investment grade credit rating
Corporations (Finance)
Debt Financing:
Line of Credit
a preauthorized loan that the corporation can draw from on a variable basis and only pay interest when money is taken out
Corporations (Finance)
Secured Transactions
A loan or credit transaction in which the lender acquires a security interest in collateral owned by the borrower
Secured transactions are secured at the moment of attachment and may be perfected
Corporations (Finance)
Secured Transactions:
Attachment
Attachment occurs when:
- Value has been given,
- The debtor has rights in the collateral, and
- The creditor either:
a. takes possession of the collateral, or
b. obtains a security agreement
Corporations (Finance)
Secured Transactions:
Perfection
Prefecting provides public notice to third parties that specific property is encumbered
Timing is critical, because it establishes priority
Corporations (Finance)
Favorable Debt Enhancements
- Redemption Terms/Prepayment Penalties
- Convertability
- Priority
- Voting Rights
Corporations (Finance)
Favorable Debt Enhancements:
Redemption Terms/Prepayment Penalties
Redemption Terms forbid the creditor from calling the debt security before maturity date
Prepayment Terms impose a penalty for the borrower paying off the debt before maturity
