Chapter 14: An overview of corporate nancing

Introduction Debtholders and stockholders have different cash ow rights and different control rights On average rms rely too much on internal funds Managers may only want to satisfy, forego positive but risk NPV because the raising of capital for the project would require new share/debt issues

Common Stock Authorised share capital: the maximum number of shares that can be issued Issues over this limit requires agreement of shareholders Issued shares held by investors are said to be issued and outstanding Treasury shares are said to be issued but not outstanding The difference between the price at which the shares are sold and their par value (x number of shares outstanding) is known as the additional paid-in capital or capital surplus. Common stock is a residual claim on the rms assets and cash ow Residual cash ow rights and control rights do not have to go together; however the benets of good decisions are felt mainly by the common stockholders, it makes sense to give them control over how the rms assets are used. Voting Cumulative Method: a common stock holder has (n of shares x n of seats open) votes This makes it easier for minority groups of shareholders to elect directors who will represent their interests Dual-class shares and private benets Googles A shares (sold to public had 1 vote) B shares (owned by founders) had 10 votes Same cash-ow rights but different control rights If everybody gains equally from better management why do shares with higher votes sell at a premium? There are private benets captured by the owners of these shares (e.g. rival companies, corruption) Tunneling: the exploitation of minority shareholders e.g. Reverse stock split, e.g. 1 share for every 100k shares; the minority shareholders owned less than 100k shares; therefore they received nothing ==>Highly illegal Equity in disguise Shares in partnerships: you can become a limited partner Advantage: tax advantage, Disadvantage: it has a limited life Trust and REITS

 REIT: any corporation/trust that specialises in real estate investment eliminates corporate tax, thus avoiding double taxation of owner income Preferred Stock Offers a series of xed payments to the investor The company can choose not to pay a preferred dividend, but in that case it cannot pay a dividend to its common stockholders Cumulative preferred stock: the company must pay all past preferred dividends before common stockholder get any money Usually some control rights Debt Interest is paid from before-tax income; dividends on common and preferred stock are paid from after tax-income; thus the gvt provides a tax subsidy for debt that it does not provide for equity Fixed or oating rate? e.g. your interest is xed at 1% above LIBOR Borrowing in other currency? Eurobond: a bond issued in a currency different other than the currency of the country in which it is issued Eurocurrency: money deposited in a currency other than the currency of the country in which it is deposited Senior debt is payed off before junior debt is paid off. Warrant: you can purchase any number of shares at a set price before a set date Convertible bond: gives its owner the option to exchange the bond for a predetermined number of shares Monthly Income Preferred Stock (MIPS) is debt for tax purposes, but equity otherwise.