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Sld17 Com and Pref Stock Fin
Sld17 Com and Pref Stock Fin
SEVENTEEN
Common and
Preferred Stock
Financing
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT 17-1
EDI TI ON
Figure 17-1
Time line during rights offering
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McGraw-Hill Ryerson
FIF T H
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th
CANADIAN
Foundations of Financial
Management
PPT 17-2
EDI TI ON
5.34 percent
(1.55)
(0.68)
3.11 percent
4.50 percent
Gross up (25%) . . . . . . . . . . . . . . . . . . . . . .
5.63
1.63
.75
(0.88)
(0.39)
3.23 percent
McGraw-Hill Ryerson Limited 2000
FIF T H
th
CANADIAN
Foundations of Financial
Management
PPT17-3
EDI TI ON
Table 17-1a
Features of alternative security issues
Common
Preferred
Stock
Bonds
Stock
Limited rights when Limited rights
1. Ownership Belongs to common
dividends are missed under default in
and control shareholders through
interest payments
of the firm voting rights and
residual claim to income
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2. Obligation None
to provide
return
Bondholders and
creditors must be
satisfied first
Highest claim
Highest
4. Cost of
distribution
Moderate
Lowest
McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
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PPT17-3
EDI TI ON
Table 17-1b
Features of alternative security issues
Common
Stock
5. Risk-return Highest risk, highest
trade-off
return (at least in
theory)
Preferred
Stock
Moderate risk,
moderate return
Not deductible
Tax deductible
Cost = Interest
payment
(1 Tax rate)
Same as common
stock
Interest usually
fully taxable
McGraw-Hill Ryerson
Bonds
Lowest risk,
moderate return
FIF T H
Foundations of Financial
Management
th
CANADIAN
PPT17-4
EDI TI ON
Figure 17-2
Risk and expected return for various security classes
Required rate of return
Co
rp
t
a
r
o
ue
iss
s
Common stock
Subordinated debentures
Preferred stock
Savings account
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Risk to investor
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FIF T H
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CANADIAN
Foundations of Financial
Management
EDI TI ON
Chapter 17 - Outline
LT 17-1
Common Stock
The Voting Right
Rights Offering
Rights-on and Ex-rights
Poison Pill
Preferred Stock
Provisions Associated with Preferred Stock
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FIF T H
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Foundations of Financial
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Common Stock
LT 17-2
They have a residual (leftover) claim to all corporate income that is not
paid out to others
McGraw-Hill Ryerson
FIF T H
th
CANADIAN
Foundations of Financial
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EDI TI ON
LT 17-3
Proxy:
a right to vote given to someone elses (absent
shareholders) vote
Majority Voting:
all directors must be elected by at least 51% of the vote
doesnt allow minority shareholders representation on
the board of directors
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Cumulative Voting:
a shareholders votes can all be used to elect 1 person
allows minority shareholders representation on board
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Foundations of Financial
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Rights Offering
LT 17-4
Rights Offering:
gives current shareholders a first option to purchase
new shares (called a preemptive right provision)
allows existing shareholders the same amount of control
they have initially
shareholder receives 1 right for each share of stock
owned
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
Management
EDI TI ON
LT 17-5
Rights-on
if you buy the stock, you will also acquire a right
toward a future purchase of the stock
occurs when a rights offering is initially announced
Ex-rights
when you buy the stock you no longer get a right
toward future purchase of the stock
occurs after a certain period of time
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
Management
EDI TI ON
Poison Pill
LT 17-6
Poison Pill:
a rights offering made to existing shareholders of a
company in order to make it more difficult for another
company to acquire it
allows existing shareholders the right to buy additional
shares of the stock at a very low price
makes hostile takeovers very expensive and unattractive
often introduced by management to protect their own
interests
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McGraw-Hill Ryerson
FIF T H
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CANADIAN
Foundations of Financial
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Preferred Stock
LT 17-7
Preferred Stock:
a hybrid security combining characteristics of both debt
and common stock
has a fixed dividend that must be paid before dividends
on common stock
dividends are not tax deductible to a company
provides the company with a balance in its capital
structure
primary purchasers are corporate investors, insurance
companies, and pension funds
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FIF T H
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Foundations of Financial
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LT 17-8
Cumulative Dividends:
if not paid in one year, dividends accumulate and must
be paid in total before common shareholders
Conversion Feature:
preferred stock may be converted into common stock at
the option of the holder
Call Feature:
company has option to redeem stock
Retractable Feature:
investor has option to redeem stock
Floating Rate Dividend:
company adjusts dividend to market conditions
McGraw-Hill Ryerson