财务管理基础课件：Common and Preferred Stock Financing

CommonandPreferredStockFinancing

ChapterOutlineCommonstockholders–RightsandprivilegesCumulativevotinganditscharacteristicsRightsofferingPoisonpillsandotherregulatoryprovisionsPreferredstockCommonStockRepresentstheultimateownershipofafirmThoughstockholdersdirectlycontrolthebusiness,itispracticallywieldedbymanagementonaneverydaybasisPreferredStockPlaysasecondaryroleinfinancingthecorporateenterpriseRepresentsahybridsecuritybycombiningsomeofthefeaturesofdebtandcommonstockPreferredstockholdersdonothaveanownershipinterestinthefirmTheyhaveaprioritytoclaimdividendsovercommonstockholdersCommonStockholders–RightsThreekeyrights:ResidualclaimtoincomeVotingrightRighttopurchasenewsharesCommonStockholders’ClaimtoIncomeCommonstockholdershavearesidualclaimtoincomeregardlessofpaymentofdividendsorretentionbythefirmTheydonothavealegalorenforceableclaimtodividendsAfirmmayhaveseveralclassesofcommonstockoutstandingthatcarrydifferentrightstodividendsandincomeInstitutionalOwnershipofU.S.CompaniesTheVotingRightCommonstockholdershavetherightto:VoteintheelectionofboardofdirectorsVoteonallothermajorissuesAssignaproxyor“powertocasttheirballot”CompaniescanhavedifferentclassesofcommonstockwithunequalvotingrightsCumulativeVotingMajorityvotingStockholdersowningabove50%ofcommonstockmayelectallofthedirectorsCumulativevotingStockholderswithlessthan50%interestmayelectsomeofthedirectorsCumulativeVotingProcess Todeterminethenumberofsharesneededtoelectagivennumberofdirectorsunderthismethodofvoting:Ifthenumberofminoritysharesoutstandingundercumulativevotingisknown,thenumberofdirectorsthatcanbeelectedcanbedetermined:TheRighttoPurchaseNewSharesAcorporatechartercontainingpreemptiverightprovisionrequires:HoldersofcommonstockmustbegiventhefirstoptiontobuynewsharesThisensuresthatmanagementcannotsubvertthepositionofpresentstockholdersStockholdersmaychoosetoselltheirrights,ratherthanexercisetheminthepurchaseofnewsharesAcorporatethatdoesnotincludepreemptiverightprovisioncaninclude“rightsoffering”initscharterTheUseofRightsinFinancingUsedbymanyU.S.companiesandispopularasfundraisingmethodinEuropeQuestionstoconsider:Howmanyrightsshouldbenecessarytopurchaseonenewshareofstock?Whatisthemonetaryvalueoftheserights?MonetaryValueofaRightWhenarightsofferingisannouncedastockinitiallytrades“rights-on”AcquiringarighttowardafuturepurchaseofthestockThevalueoftherightwhenastockistradingrights-onis:

R=(M0–S)÷(N+1)

Where:M0=marketvalue–rights-on;S=subscriptionprice;N=numberofrightsrequiredtopurchaseanewshareofstockEx-rights:BuyingshareswithnorighttowardfuturepurchaseThevalueoftherightwhenastockistradingatex-rightis:

R=(Me–S)÷N Where:Me=marketvalue–ex-rightsEffectofRightsonStockholdersPositionOption1:SupposeStockholderAowns9sharesbeforetherightsofferingandhas$30incash.Hisholdingswouldappearas:Ifhereceivesandexercises9rightstobuyonenewshareat$30:EffectofRightsonStockholdersPosition(cont’d)Option2:Sellrightsinthemarketandstaywithhispositionofowningonlyninesharesandholdingcash.Theoutcomewouldbe:Ifastockholderneitherexerciseshisrightsnorsellstherights,hewouldbeatalossasthetotalvalueofhisholdingswouldcomedownasshownbelow:DesirableFeaturesofRightsOfferingThepositionofthecurrentstockholdersisprotectedinregardtovotingrightsandclaimstoearningsUseofrightsofferingsgivesthefirmabuilt-inmarketfornewsecurityissuesItmayalsogeneratemoreinterestinthemarketthanastraightpublicissueStockpurchasedthrougharightsofferingcarrieslowermarginrequirementsMarginrequirementisthecashorequitythatmustbedepositedwithbrokeragehouseorbank,withabalancefundeligibleforborrowingPoisonPillsArightsofferingmadetoexistingshareholdersofacompanyAllowsexistingshareholderstobuyadditionalsharesofthestockataverylowpriceUsedtoavoidatakeoverMakeshostiletakeoversveryexpensiveandunattractiveAmericanDepositoryReceiptsCertificatesthathavealegalclaimonanownershipinterestinaforeigncompany’scommonstockAlsoreferredtoasAmericanDepositoryShares(ADSs)AllowsforeignsharestobetradedintheUnitedStatesmuchlikecommonstockAdvantagesofADRsfortheU.S.InvestorAnnualreportsandfinancialstatementsarepresentedinEnglishaccordingtoGAAPDividendsarepaidindollarsandaremoreeasilycollectedConsideredtobe:MoreliquidLessexpensiveEasiertotradethanbuyingforeigncompanies’stockdirectlyonthatfirm’shomeexchangeDrawbacksofADRsfortheU.S.InvestorADRsarealsotradedintheirowncountrysubjectinginvestorstocurrencyriskInfrequentreportingoffinancialresultsInformationlagduetothetimefortranslationofreportsintoEnglishPreferredStockFinancingAnintermediateorhybridformofsecurityLacksthedesirablecharacteristicsofdebtandcommonstockMerelyentitledtoreceiveastipulateddividendReceivepaymentofdividendsbeforecommonstockholdersRightstoannualdividendsisnotmandatoryforcorporationsJustificationforPreferredStockMaybeissuedtoachieveabalanceincapitalstructureAmeansofexpandingthecapitalbasewithout:DilutingthecommonstockownershippositionIncurringcontractualdebtobligationsAdrawbackisthatdividendpaymentsarenottax-deductibleInvestorInterestPrimarypurchasersofpreferredstockarecorporateinvestors,insurancecompanies,andpensionfundsUnderthetaxlaw,thecorporateinvestormustneedtoaddonly30%ofpreferredorcommondividendsreceivedfromanothercorporation,toitstaxableincomeBycontrast,alltheinterestofbondsaretaxabletotherecipientexceptformunicipalbondinterestSummaryofTaxConsiderationsTaxconsiderationsforpreferredstockworkintwooppositedirections:Theymaketheafter-taxcostofdebtcheaperthanpreferredstocktotheissuingcorporationInterestisdeductibletothepayerTaxconsiderationsgenerallymakethereceiptofpreferreddividendsmorevaluablethanbondinterestSince70%ofthedividendisexemptfromtaxationProvisionsAssociatedwithPreferredStockThefollowingstipulationsandprovisionsdefinepreferredstockholder’sclaimtoincomeandassetsCumulativedividendsConversionfeatureCallfeatureParticipationprovisionFloatingrateAuctionratepreferredstockParvalueCumulativeDividendsCumulativepreferredstockhaveacumulativeclaimtodividendsIfpreferredstockdividendsarenotpaidinanyoneyear,theyaccumulateandmustbepaidintotalbeforecommonstockholderscanreceivedividendsThisfeaturemakesacorporationawareofitsobligationstopreferredstockholdersAfinancialrecapitalizationmayoccurifafinanciallytroubledfirmhasmissedanumberofdividendpaymentsUnderthisarrangement,preferredstockholdersreceivenewsecuritiesinplaceofthedividendthatisunpaidConversionFeatureAllowsacompanytoconvertpreferredstockintoaspecifiednumberofsharesofcommonstockAllowsacompanytoforceconversionfromconvertiblepreferredstockintoconvertibledebtCompanycantakeadvantageoffallinginterestrates,orCompanycanprefertochangethepreferreddividendsintotax-deductibleinterestpaymentsCallFeatureAllowscorporationsfortheretirementofsecuritybeforematurityAtsomesmallpremiumoverpar,atthediscretionofthecorporationApreferredissuecarryingacallprovisionwillbeaccordedaslightlyhigheryieldthanasimilarissuewithoutthisfeatureParticipationProvisionAsmallpercentageofpreferredstockissuesareparticipatingpreferredsTheymayparticipateoverandabovethequotedyieldIfthecommonstockdividendequalsthepreferredstockdividend:ThetwoclassesofsecuritiesmayshareequallyinadditionalpayoutsFloatingRateFloatingratepreferredstockshavedividendsadjustableinnatureDividendischangedbasedonthecurrentmarketconditionsInvestorscanminimizetheriskofpricechangesInvestorscantakeadvantageoftaxbenefitsassociatedwithpreferredstockcorporateownershipThepricestabilitymakesitequivalenttoasafeshort-terminvestmentAuctionRatePreferredStockAlsoknownasDutchauctionpreferredstockThestockisissuedtothebidderwillingtoacceptthelowestyieldandthentothenextlowestbidder,andsoonuntilallthepreferredstockissoldLong-terminnature,behaveslikeashort-termsecurityTheauctionperiodsvary