Chapter Nine

Corporate Financial Structure

Corporate Finances: Key Terms Security: a share, participation, or other interest in

property or an enterprise of the issuer or an obligation of the issuer

Equity Security: a security representing ownership interest in an enterprise (often called a shareshare)

Equity Capital: capital received by a corporation in return for issuance of stock

Debt Security: a security representing an obligation of the corporate issuer (often called a bond)

Debt Capital: money received by a corporation in return for issuing debt securities

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Corporate Finances: Key Terms Bondholder: one to whom a debt is

owed by a corporation Dividend: a distribution of corporate

profits

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Types of Stock

Common StockCommon Stock: : Ordinary stock of a corporation having no special privileges

Preferred StockPreferred Stock: : Stock in a corporation that carries certain rights and privileges

Comparison of Common and Preferred Stock

Common Stock Preferred Stock

Voting Rights Usually one vote per share

Voting rights may or may not exists; articles will specify

Distribution Rights

No right to distributions; distributions declared in discretion of board and corporation must be solvent

Distributions may be cumulative. Shareholders may have participating preferred stock.

Comparison of Common and Preferred Stock

Common Stock

Preferred Stock

Liquidation Rights Shareholders receive assets after distribution to creditors and then preferred shareholders

Shareholders receive assets after creditors and before common shareholders

Conversion Rights No conversion rights Shareholders may have right to convert their preferred shares into some other type of shares

Comparison of Common and Preferred Stock

Common Stock Preferred Stock

Redemption Rights

No redemption rights

Shareholders may be forced to sell their stock back to corporation or to compel corporation to purchase their stock at agreed-upon price

Comparison of Equity and Debt Securities

Equity Securities (“Stock”)

Debt Securities (“Bonds)

Shareholder is an owner of the corporation and is entitled to vote and receive distributions, if earnings permit

Bondholder is an outside creditor of the corporation and is entitled to timely repayment of the debt

Issuance of shares produces cash for the corporation

Issuance of bonds produces cash for the corporation

Issuance of shares dilutes power of existing shareholders but costs the corporation nothing

Issuance of bonds does not dilute owner of existing shareholders but bonds must be repaid

Comparison of Equity and Debt Securities

Equity Securities (“Stock”)

Debt Securities (“Bonds)

If corporation is insolvent, no distributions will be paid to any shareholder

Bondholder may be entitled to periodic payments of interest and principal whether or not the corporation is solvent

Corporation may not deduct distributions paid to shareholders

Corporation may deduct interest paid to bondholders and reduce taxable income

In the event of liquidation, shareholders receive assets after outside creditors/bondholders

In event of liquidation, bondholders receive assets before shareholders

Key Features of Corporate Finances

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To raise money, corporations will issue stock (equity securities), which show ownership interest in the corporation or bonds (debt securities), which are loans to the corporation.

Shares issued by a corporation must be authorized by the articles.

The par value of a share is the lowest price for which it can be sold.

Key Features of Corporate Finances

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If stock has no par value, it can be sold for whatever amount the directors determine is in the best interest of the corporation.

Corporations may have more than one class of stock.

“Common” stock is ordinary stock of the corporation and usually has voting rights, distribution rights, and liquidation rights.

Key Features of Corporate Finances

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“Preferred” stock has some sort of right or preference other classes do not have, often as to cumulating dividends, conversion, or redemption.

Debt securities may be secured by real estate or personal property; in the event of a default the creditor can recover the property pledged as security or collateral.

Key Features of Corporate Finances

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Debt securities may have favorable redemption terms or conversion terms.

Corporations are said to be subject to “double taxation”; the corporation pays tax on money it earns, and shareholders then pay tax on distributions made to them. Interest paid on bonds is a deductible expense for a corporation.