Common-and--Preferred-St课件

1、Common and Preferred Stock Financing17Chapter 17 - OutlineCommon StockThe Voting RightRights Offering“Rights-on” and “Ex-rights”Poison PillPreferred StockProvisions Associated with Preferred StockRisk and Expected ReturnSummary and ConclusionsPPT 17-22Common StockStockholders - Ultimate owners of a

2、firmLegally, stockholder directly controls the businessA large creditor may have the power to exert pressure on the firm to meet certain financial performance standards3Preferred StockPlays a secondary role in financing the corporate enterpriseRepresents a hybrid security by combining some of the fe

3、atures of debt and common stockStockholders do not have an ownership interest in the firmStockholders have a priority of claims to dividends superior to that of common stockholders4Common Stockholders Claim to IncomeCommon stockholders have a residual claim to incomeThese funds can be paid out as di

4、vidends or retained by the firmThey do not have a legal or enforceable claim to dividendsA firm may have several classes of common stock outstanding that carry different rights to dividends and income5Institutional Ownership of U.S. Companies6The Voting RightCommon stockholders have the right to:Vot

5、e in the election of board of directorsVote on all other major issuesAssign a proxy or “power to cast their ballot”Companies can have different classes of common stock with unequal voting rightsSuch as “founders shares”Bondholders and preferred stockholders may vote:If a corporate agreement has been

6、 violated7The Voting RightProxy:assigning shareholders right to vote to another individualMajority Voting:all directors must be elected by at least 51% of the votedoesnt allow minority shareholders representation on the board of directorsCumulative Voting:a shareholders votes can all be used to elec

7、t 1 personallows minority shareholders representation on board PPT 17-48Cumulative Voting ProcessTo determine the number of shares needed to elect a given number of directors under this method of voting:If the number of minority shares outstanding under cumulative voting is known, the number of dire

8、ctors that can be elected can be determined:9The Right to Purchase New SharesHolders of common stock must be given the first option to buy new sharesEnsures that management cannot subvert the position of present stockholders10The Use of Rights in FinancingUsed by many U.S. companies and is popular a

9、s fund raising method in EuropeQuestions to consider:How many rights should be necessary to purchase one new share of stock?Rights requiredStockholders may choose to sell their rights, rather than exercise them in the purchase of new shares11The Use of Rights in Financing (contd)What is the monetary

10、 value of these rights?Monetary value of a right two termsWhen a rights offering is announced a stock initially trades rights-onThe value of the right when a stock is trading rights-on is:Alternate formula:Where: Mo= market value right-on; S = subscription price; N = number of rights required to pur

11、chase a new share of stock; Me = market value when trading ex-rights. Ex-rights when you buy a share there is no right towards future purchase 12Effect of Rights on Stockholders PositionOption 1:Suppose Stockholder A owns 9 shares before the rights offering and has $30 in cash. His holdings would ap

12、pear as:If he receives and exercises 9 rights to buy one new share at $30:13Effect of Rights on Stockholders Position (contd)Option 2:Sell rights in the market and stay with his position of owning only nine shares and holding cash. The outcome would be:As indicated, whether you choose to exercise a

13、rights or not, the stock will still go down a lower value. 14Three options when presented with a rights offeringExercise the rights; no net gain or losssell the rights; no net gain or lossallow the rights to lapse; a loss will be incurred due to the dilution of existing shares that is not offset by

14、value of unsold or unexercised rights.15Poison PillsA rights offering made to existing shareholders of a companyUsed to avoid a takeoverMakes hostile takeovers very expensive and unattractiveAllows existing shareholders the right to buy additional shares of the stock at a very low price16American De

15、pository ReceiptsCertificates that have a legal claim on an ownership interest in a foreign companys common stockAlso referred to as American Depository Shares (ADSs)Allows foreign shares to be traded in the United States much like common stock17Advantages of ADRs for the U.S. InvestorAnnual reports

16、 and financial statements are presented in English according to GAAPDividends are paid in dollars and are more easily collectedConsidered to be:More liquidLess expensiveEasier to trade than buying foreign companies stock directly on that firms home exchange18Drawbacks of ADRs for the U.S. InvestorAD

17、Rs are also traded in their own country subjecting investors to currency riskInfrequent reporting of financial resultsInformation lag due to the translation of reports into English19Preferred Stock FinancingAn intermediate or hybrid form of securityLacks the desirable characteristics of debt and com

18、mon stockMerely entitled to receive a stipulated dividend.Receive payment of dividends before common stockholdersRights for annual dividends is not mandatory for corporationsFirm may forgo the preferred dividends when deemed necessary20Justification for Preferred StockMay be issued to achieve a bala

19、nce in capital structureA means of expanding the capital base without:Diluting the common stock ownership positionIncurring contractual debt obligationsA drawback is that interest payments are not tax-deductible21Investor InterestPrimary purchasers of preferred stock are corporate investors, insuran

20、ce companies, and pension fundsUnder the tax law, the corporate investor must need to add only 30% of preferred or common dividends of another corporation, to its taxable incomeBy contrast, all the interest of bonds are taxable to the recipient except for municipal bond interest22Summary of Tax Cons

21、iderationsTax considerations for preferred stock work in two opposite directions:They make the after-tax cost of debt cheaper than preferred stock to the issuing corporation.Interest is deductible to the payerTax considerations generally make the receipt of preferred dividends more valuableSince 70%

22、 of the dividend is exempt from taxation23Cumulative DividendsCumulative preferred stock have a cumulative claim to dividendsThis feature makes a corporation aware of its obligations to preferred stockholdersA financial recapitalization may occur if a financially troubled firm has missed a number of

23、 dividend payments24Conversion FeaturePreferred stock may be convertible to a specified number of shares of common stockAllows the company to force conversion from convertible preferred stock into convertible debt,Allows company to take advantage of falling interest rates, ORAllows company to change

24、 the preferred dividends into tax-deductible interest payments25Call FeatureAllows corporations for the retirement of security before maturityAt some small premium over par, at the discretion of the corporationA preferred issue carrying a call provision will be accorded a slightly higher yield than

25、a similar issue without this feature26Participation ProvisionA small percentage of preferred stock issues are participating preferredsThey may participate over and above the quoted yieldIf the common stock dividend equals the preferred stock dividend:The two classes of securities may share equally i

26、n additional payouts27Floating RateDividends are adjustable in nature - floating rate preferred stockInvestors can minimize the risk of price changes.Investors can take advantage of tax benefits associated with preferred stock corporate ownershipThe price stability makes it equivalent to a safe shor

27、t-term investment28Dutch Auction Preferred StockShort-term in natureThe security matures every seven weeks and is re-auctioned at a subsequent biddingAllows investors to keep up with the changing interest rates in the short-term marketAllows corporate investors to invest at short-term rates and get

28、tax-benefits as well29Comparing Features of Common, Preferred Stock and DebtHighest return and risk is associated with common stockPreferred stock generally pays a lower returnDue to the 70% tax exemption status for corporate purchasersIncreasingly high return requirement on debt, is based on:The pr

29、esence or absence of security provisionThe priority of claims on unsecured debts30CommonStock Belongs to common shareholders through voting rights and residual claim to income None Lowest claim of any security holder HighestPreferredStockLimited rights whendividends are missedMust receive payment be

30、fore common shareholderBondholders and creditors must be satisfied firstModerateBondsLimited rights under default in interest paymentsContractual obligationHighest claimLowest1.Ownership and control of the firm2.Obligation to provide return3.Claim to assets in bankruptcy4.Cost of distributionPPT17-1

31、3Features of alternative security issues31CommonStockHighest risk, highest return (at least in theory)Not deductibleDividend to another corporation is usually tax exemptSpecial tax treatment with dividend tax creditPreferredStockModerate risk, moderate returnNot deductibleSame as common stockBondsLo

32、west risk, moderate returnTax deductible Cost = Interest payment (1 Tax rate)Interest usually fully taxable5.Risk-return trade-off6.Tax status of payment by corporation7.Tax status of payment to recipientPPT17-14Features of alternative security issues32Risk and Expected Return for Various Security C

33、lasses33Dividend Policy and Retained Earnings18Chapter OutlineDecisions on use of firms annual earningsDividends and the dividend policyFactors influencing the dividend policyStock dividends and stock splitsRepurchase of the firms shares35The Marginal Principle of Retained EarningsBenefits to stockh

34、olders analyzed by comparing:Rate of return on retained earningsEarnings that may be generated by offering dividendsProject financed by internally generated funds must provide a higher rate of return:Compared to what stockholders can achieve on other investments36Life Cycle Growth and Dividends37Div

35、idends as a Passive VariableDividends are paid out only if the corporation cannot make better use of the funds for the benefit of stockholdersActive decision variable is the retained earningsResidual (after fulfilling internal corporate expenses) is paid to stockholdersCash dividends38An Incomplete

36、TheoryResidual theory of earnings does not consider the stockholders opinion on dividendsIt is considered acceptable, if the stockholders only concern is achieving highest returns :Corporate retained earnings remaining in the businessPaid out as current dividendsIf however, the stockholder prefers o

37、ne over the other option, then this theory is incomplete39Arguments for the Relevance of DividendsDividends resolve uncertainty in the minds of investorsIt can be hypothesized that stockholders might:Apply a higher discount rate (Ke), and Assign a lower valuation of funds that are retained in the bu

38、sinessBecause of the information content of dividends viewed more favorably than retained earnings to the stockholdersStockholders needs and preferences go beyond the marginal principle of retained funds40Arguments for the Relevance of Dividends (contd)In practice, it appears that most corporations

39、adhere to the following logic:Investment opportunities relative to a required return (marginal analysis) are determinedThen, it is tempered by subjective notion of stockholders desiresFor mature firms:An analysis of both investment opportunities and stockholder preferences may indicate that a higher

40、 rate of payout is required41Corporate Dividend Policy42Dividend StabilityMaintenance of stability is a primary factor in considering stockholder desire in dividend policyDollar amount of cash dividends tends to be more stableIncreases in value takes place when new permanent levels of income are ach

41、ievedManagement hopes to lower the discount rate (Ke), applied to future dividends, thus raising the value of the firm43Corporate Profits and Dividends for Non-Financial Firms 44Legal RulesMost states forbid payment of dividends that might impair the initial capital contributions to the firmThey may

42、 thus be distributed only from past and current earningsAim is to protect creditorsIf the firm chooses to pay dividends equal to the retained earnings, the operation of the firm may be jeopardized45Raiding the CapitalAssume a company has the following statement of net worth, the maximum dividend pay

43、ment would be $20 millionCommon stock (1 million Shares at $10 par value)*.$10,000,000Retained earnings. $20,000,000Net worth $30,000,000* If there is a paid-in capital in excess of par account, some states will allow additional dividend payment while others will not. To simplify the problem now, pa

44、id-in capital in excess of par is not considered. 46Cash Position of the FirmThere are limitations to the use of current earnings as an indicator of liquidityA growth firm producing the greatest gains in earnings may be in the poorest cash positionThere is a buildup in receivables and inventory, wit

45、h a rapid expansion in sales and earningsThis may far exceed cash flow generated through earnings47Access to Capital MarketsA medium-to-large size company having relatively easy access to financial markets may be willing to pay dividendsIt can sell new common stock or bonds in the future if and when

46、 funds are necessarySome may issue debt or stock and use part of the proceeds to guarantee the maintenance of current dividendsJustifying this action on the basis of maintaining stable dividends48Desire for ControlDirectors and officers of a small, closely held firms may hold back paying dividendsTo

47、 avoid diluting the cash positionLarger firms face a different kind of threat:Stockholders, in light of previously offered healthy dividends, may demand the removal of management if dividends are withheld for any reason49Tax Position of ShareholdersJobs and Growth Tax Relief Act of 2003Dividends and

48、 long-term capital gains only, for high income tax payers, are taxed up to a maximum of 15%Short-term capital gains are taxed up to a maximum of 30%Those in the lower tax bracket are now taxed at 5% on both types of incomeHigh dividend paying stock is attractive, now that the tax rate differential h

49、as been eliminated by the legislation50Dividend Payment ProceduresCash dividends are usually paid quarterly though quoted on an annual basisDividend yield (%):Annual dividend per share / current stock price51Dates Associated with Declaration of Quarterly DividendsHolder-of-Record Date Date on which

50、the firm examines its books to determine who is entitled to cash dividendsPossible if investor has bought or owned the stock before ex-dividend dateEx-Dividend Date Is two-business dates before the holder-of-record dateValue of the stock will go down by the value of the quarterly dividend on the ex-

51、dividend date52Dates Associated with Declaration of Quarterly Dividends (contd)Dividend Payment DateThe date when checks will be sent to the entitled stockholders53Stock DividendRepresents a distribution of additional shares to common stockholdersTypically, is in the 10% rangeLarger distributions of

52、 20-25% or more are usually considered to have the characteristics of a stock split54XYZ Corporations Financial Position Before Stock Dividend55XYZ Corporations Financial Position after Stock Dividend56Value to the InvestorAssumption: 1 million shares were outstanding before the stock dividend and 1

53、.1 million shares afterwardAssuming that a firm has an after-tax earnings of $6.6 million. Without a stock dividend, earnings per share would be:Earnings per share = Earnings after taxes Shares outstandingWithout stock dividend: = $6.6 million = $6.60 1 million sharesWith stock dividend: = $6.6 mill

54、ion = %6.00 (10% decline) 1.1 million sharesEarnings per share have decreased by exactly the same percentage that shares outstanding increased57Value to the Investor (contd)Assuming that Stockholder A had 10 shares before the stock dividend and 11 afterward, his total claims to earnings would be: Cl

55、aim to earnings = Share X Earnings per shareWithout stock dividend = 10 X $6.60 = $66With stock dividend = 11 X $6.00 = $66Assuming that the stock sold 20 times earnings before and after the stock dividend, the total market value of the portfolio in each case would be: Total market value = Shares X

56、(P/E ratio X Earnings per share)Without stock dividend = 10 X (20 X $6.60) = 10 X $132 = $1,320With stock dividend = 11 X (20 X $6.00) = 11 X $120 = $1,320 The total market value is unchanged58Possible Value of Stock DividendsIf at the time a stock dividend is declared, the cash dividend per share r

57、emains constant, the stockholder will receive greater total cash dividends.59Use of Stock DividendsMost frequently used by growth companies as a form of informational content.Explains the retentions of funds for reinvestment purposesMarket reaction may be neutral or slightly positiveMay also be used

58、 to:Camouflage inability of firm to pay dividendsCover up ineffectiveness in generating a cash flowInformed investors may react negatively60Stock SplitsSimilar to a stock dividend - only more numbers of shares are distributedThe NYSE and the FASB encourage distribution in excess of 20-25% to be handled as stock splitsThe accounting for a stock split involves:No transfer of funds from retained earnings to the capital accountsR