Pg 35

Question 1

What is a dilution regarding stock?

Answer 1

Reduction in ownership percentage of a share of stock caused by the issuance of new shares of stock by the corporation. Because the corporation adds more stock, that makes the current shareholders have a smaller percentage of overall stock.

Question 2

If a corporation originally issues 1000 shares, and you bought 600, and the corporation later issues another 1000, what does that mean?

Answer 2

The corporation has diluted your percentage. You originally had a 60% ownership interest, but now you only have a 30% ownership interest, so you aren’t the majority shareholder anymore, which means you have to work with the other shareholders to get elections to the board

Question 3

What are different ways that stock dilution can happen?

Answer 3

If someone is offered shares of stock in exchange for services, extra stock is issued, stock is used to buy goods, convertible bonds are converted into stock, etc.

Question 4

What is the impact of a stock dilution?

Answer 4

It reduces the shareholder’s percentage of corporate ownership, so that essentially reduces the value of his existing shares

Question 5

What is recapitalization?

Answer 5

This allows a corporation to change its mix of debt and equity by exchanging one form of financing for another. Ie: stock for bonds or bonds for stock

Question 6

What is capital?

Answer 6

A corporation’s blend of debt and equity. This is the balance of debt security from corporate bonds and equity in outstanding shares of stock.

Question 7

If a corporation has lots of outstanding bonds, and they decide to lower that debt by recapitalizing in the form of paying back lots of the debt and issuing stock, what are the ways they can do that?

Answer 7

• they can either sell stock and use the money to pay off the debt
  – or they can do an exchange where they issue stock for the debt which changes the bondholders into stockholders

Question 8

What are the two different ways that corporations can do recapitalization?

Answer 8

– direct exchange: trade one form for the other

– sale in purchase: bonds are sold and the proceeds are used to buy back additional shares of stock or vice versa

Question 9

What is the upside of doing a recapitalization?

Answer 9

The corporation gets rid of bonds, which means less debt to pay before dividends are paid to shareholders. This reduces the risk that shareholders will not get paid. The lower risk increases the price per share and raises the value of the corporation’s stock.

Question 10

What are different ways you can raise corporate capital?

Answer 10

• offer securities to the public or a limited group

– bank loans/mortgage/lease back

Question 11

What does it mean to issue shares?

Answer 11

A share of stock is a profit sharing contract where capital is the consideration for a right to participate in the profits and growth of a corporation through dividends and other distributions.

Question 12

What are different ways that you can become a shareholder?

Answer 12

• through a subscription contract with a corporation for issue of new shares
  – purchase treasury shares from the corporation
  – transfer of existing holder of outstanding shares
  – preemptive rights

Question 13

What does it mean to become a shareholder through a subscription contract with the corporation for the issuance of new shares?

Answer 13

An agreement to pay for original unissued shares of the corporation.

Question 14

If you take part in a pre-incorporation subscription contract for the issuance of new shares, how long is that irrevocable for?

Answer 14

A certain period of time, usually six months.

Question 15

If a subscriber to a pre-incorporation subscription defaults, what happens?

Answer 15

That is debt that is due to the corporation.

Question 16

How do pre-incorporation subscriptions usually work?

Answer 16

People agree to buy a certain number of shares contingent on a certain amount of capital getting raised. Formation of the corporation only happens if enough pre-incorporation subscriptions are gotten. After formation, the corporation calls on the subscribers to pay the amount that they promised.

Question 17

What are the rights of a subscriber?

Answer 17

Until a subscriber becomes a holder of record, he has no right to vote, and get notice of meetings, inspect corporate books, or get dividends

Question 18

Who is the holder of a pre-incorporation subscription contract?

Answer 18

Because the corporation is not yet formed, this contract is with the incorporator or organizers of the corporation. Once the corporation is formed, the corporation ratifies or adopts the subscription agreement before they issue the shares.

Question 19

Who is the only person that can refuse a pre-incorporation subscription agreement?

Answer 19

The corporation, because they didn’t technically exist when the subscription was entered into. The agreement is irrevocable by the subscriber for a certain period of time, which is usually six months

Question 20

What does it mean to raise capital by purchasing treasury shares from the corporation?

Answer 20

Shares were already issued but they are reacquired by the corporation