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Corporate Stocks
by Mrs. Belen Apostol
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Corporate Stocks
• Long term capital requirements
involve accumulation of values or
fixed assets.
• Primary sources of long-term
financing:
1. Sale of stocks
2. Sale of bonds
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Stock Financing
• refers to shares of stock sold to raise
funds for long-term financing requirements
• Its objective is to increase equity capital
– e.g. Public utility firms, finance expansion
through stock financing. (PLDT)
• Advantage
– does not burden the company with pressure
of redeeming the stocks at a given date.
– does not have maturity periods
– non-interest bearing
– does not require collaterals
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Capital stock, Dividends, & Retained
Earnings
• Capital stock – interest of the owners of a
corporation.
• Issued stocks – portion of the authorized
stock which has been issued.
• Unissued stocks – not yet issued
• Dividends – the net income distributed to
the owners.
• Retained earnings- retained profits not
declared as dividends.
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Classes of Corporate Stocks
• Common Stock
• Preferred Stock
• Common Stock – represents the real
equity capital.
- has a residual claim (after debts
have been paid) to earnings and assets
which carries the risk of business success
or failure.
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Common Stock
• Varieties of Common Stock
1.
2.
3.
4.
5.
Classified common stock
Deferred stock
Voting trust certificate
Guaranteed stock
Debenture stock
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Varieties of Common Stock
1. Classified Common Stock - common
stock may be classified to suit various
requirements of the issuing firm and
investors.
2. Deferred Stock – minor type of issue
which entitles the holder to receive
dividends, and in the event of dissolution,
assets, after the common stockholders
have been paid.
- normally issued to founders
promoters or managers as bonus for their
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efforts in getting the corporation started.
Varieties of Common Stock
3. Voting Trust Certificates – given to
trustees of a corporation when activities
are entrusted to them.
- certificates provide the trustee the
power to vote.
- made to make certain that the voting
power remains in certain hands for a
period of time.
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Varieties of Common Stock
4. Guaranteed Stocks – stocks wherein the
payment of dividends is guaranteed by
another corporation.
- arise when a corporation purchases
or leases the property of another.
- a holding company may also
guarantee the stock issue of one of its
smaller subsidiaries to make the issue
more attractive in the market.
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Varieties of Common Stock
4. Debenture Stock – fixed-interest
securities issued by limited companies in
return for long-term loans.
- redemption date falls between 10 – 40
years from the date of issue
- Types:
1. Fixed debentures
2. Floating debentures
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Debenture Stock
• Fixed debentures – secured by specific
assets
• Floating debentures – secured by a
charge on the assets of the firm.
– Interest on debentures must be paid whether
the company makes a profit or not.
– In the event of liquidation, debenture holders
rank ahead of all shareholders in their claims
on the company’s assets
• Convertible debenture – carries an option
at a fixed future date to convert the stock
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into common shares at a fixed price.
Common Stock
• Advantages of Common Stock Financing
1. It does not entail fixed charges –
dividends are paid only when profits are
realized by the company.
2. There is no fixed maturity date attached
to common stock financing
3. The firm’s credit standing is enhanced
with the sale of common stock –losses
are absorbed first by the common stock
4. There are times when common stock is
easier to sell than debt.
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Common Stock
• Disadvantages of Common Stock Financing
1. It gives new shareholders the right to share
control of the corporation.
2. It has a dilutive effect on the corporation’s
earnings per share and price per share
3. It is more expensive to underwrite and
distribute common stock than preferred
stock
4. There is a risk that investors may perceive
negatively the issuance of common stock
resulting to a fall in the price of the stock.
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Preferred Stock
• A stock which has a claim on assets before
common stock
- it has a prior claim to dividends up to a
specified amount or rate.
- it is a permanent investment for the
company
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Preferred Stock
• Provisions of Preferred Stock:
1. Claim to dividends
2. voting rights
3. subscription rights
4. callability
5. convertability
6. participation
7. classes
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Preferred Stock
• Claim to Dividends – preferred
stockholders are entitled to a fixed
dividend before common
stockholders receive their dividends.
• Classification:
1. cumulative
2. non-cumulative
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Preferred Stock
• Claim to Dividends
Cumulative Preferred Stock –
accumulates dividends even if it is
not paid for years. Accumulated
dividends must be paid first before
paying any common stockholder
Non-cumulative Preferred Stock –
does not accumulate dividends.
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Preferred Stock
• Voting Rights – Preferred stockholders, do
not have the right to vote.
• Preferred stockholders vote if:
1. The corporation proposes to issue a debt
security of a long-term nature or additional
preferred stock of equal standing with the
outstanding preferred stock.
2. The corporation misses a dividend or fails to
pay a specified number of accumulated
dividends, the preferred stockholders can
participate in the annual election of the
directors
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Preferred Stock
• Subscription Rights – preferred
stockholders have the right to subscribe
additional issues of stock. (pre-emptive right)
• Two forms:
1. those with pre-emptive right; and
2. those without pre-emptive right
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Preferred Stock
• Callability
• Preferred Stocks may also be classified as:
1. Callable – those which may be bought back
by the issuing corporation at its option, but
at a stated call price.
2. Non callable
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Preferred Stock
• Convertibility – they can be converted into
common shares within a certain period after
the issuance of the preferred stock.
• Preferred stock may be convertible; or nonconvertible
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Preferred Stock
• Participation – participating or sharing with
common stock in additional dividends after
the preferred stock has been credited with its
regular dividends.
• Preferred stock may either be participating or
non-participating
• Classes- preferred stock may also be issued
in different classes for different purposes.
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Preferred Stock
• Advantages of the Preferred Stock Issue
1. The claim of preferred stockholders on corporate
earnings is usually limited to a specific amount of
rate per share
2. Preferred stockholders are owners and they have no
claim into bankruptcy proceedings for non-payment
of dividends.
3. Preferred stock do not carry the burden of
retirement of repayment since they are considered
permanent financing.
4. The issuance of preferred stocks will not jeopardize
the existing controlling interest of the common
stockholders.
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Preferred Stock
• Advantages of the Preferred Stock Issue
5. The various provisions which may be
incorporated in a preferred stock issue make
it a very flexible financing device.
6. The cost of capital raised by preferred stock
is less than that of common stock
7. Preferred stock increases the leverage of the
common stockholders.
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Preferred Stock
• Disadvantages of the Preferred Stock Issue
1. Dividends are fixed payments and it
increases the financial risk of the firm
resulting to increases in the cost of all
financing
2. Dividends are not deductible as a tax
expense, unlike interest paid on debt
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Other Stock Features & their characteristics
• There are other stock features and
characteristics which aim to satisfy the
requirements of either the investor or the
issuing company.
• Treasury Stock - one issued by the
corporation, fully paid for, reacquired by the
corporation by purchase or other means, and
not cancelled. It carries no voting rights, nor
the right to dividends and excluded from the
computations concerned with capital stock. It
may be sold less than the legal par value
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whenever circumstances require
Treasury Stock
• The major use of treasury stock
consists of the following:
1. Stock options
2. Acquisitions
3. Investments
4. Stock splits
5. Stock dividends; and
6. Conversion of convertible securities
including warrants.
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Stock Options
• A right given by the corporation allowing
an individual at his option to buy a certain
number of shares of, usually common
stock, from the company within a certain
time period.
• Treasury stocks may be sold to holders of
stock options.
• Treasury stock losses its identity and
becomes common stock, with all its rights
and attributes.
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Acquisitions, Investments, stock split
• Happens when a large firm takes control
of a small firm.
• Investment – purchase of an asset or
undertaking for any commitment, which
involves an initial sacrifice followed by
subsequent benefits.
• Stock split- an issue of new shares to
stockholders without increasing total
capital. It reduces the average quoted
price of shares to promote their
marketability
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Stock Dividends, Convertible
Securities, Warrants
• Stock Dividends – dividends paid in the
company’s own stock, including treasury
stock.
• Convertible Securities – refer to preferred
stock or bonds with option to convert into
common stock.
• Warrants- an option or right exercisable by
its holder, to purchase stock at a stated
price during a stipulated period of time.
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Par Value Stock
• Par value – stated value in the shares of
corporate stock
• Par value stock – a stock with a stated
value
– The par value of a share of stock is equal to the
minimum price, specified in the corporate
charter, at which it may be sold in order for the
stock to be fully paid and be non-assessable.
• Importance of par value:
• It establishes the amount due the preferred
stockholders in the event of liquidation
• The preferred dividend is frequently stated as a
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percentage of the par value
No Par value stocks, Book Value
Stock
• No Par value stocks - those shares of
stock without a face or nominal value.
Dividends are expressed in peso amounts
rather than percentage
• Book Value – stated value of a stock
based on the accounting concepts of
recorded value as reflected in the balance
sheet.
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Market Value of stock, Economic
Value of a stock
• Market value – value placed at any one
time on a stock traded in a stock exchange
or over the counter, or even between
parties in an encumbered transaction
without duress.
• Economic Value – value of a stock as
reflected by its current and future earnings
power, plus any potential recovery of all or
part of the investment.
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