Common and preferred stock financing-FINA

Common stock

Represents the basic ownership equity in a corporation -Management controls the corporation on a daily basis -Ultimate control rests with stockholders

Majority voting

Stockholders owning above 50% of common stock may elect all of the directors

Cumulative voting

Stockholders with less than 50% interest may elect some of the directors

Types of voting

-Majority -Cumulative

Preferred stock

-Plays a secondary role in financing the corporate enterprise -hybrid security features of both common and preferred stock -Preferred stockholders do not have an ownership in the firm, but have a priority to claim dividends over common stockholders

Common stockholders- rights

-Residual claim to income -voting right -Right to purchase new shares

Increasingly high return requirement on debt, based on:

-The presence or absence of security provision -The priority of claims on unsecured debts

preferred stock financing

Hybrid/Intermediate form of security Lacks desirable characteristics of debt and common stock -merely entitled to receive a stipulated dividend -Receive payment of dividends before common stockholders -Rights to annual dividends is not mandatory for corporations

Par Value of preferred stock

Is set at the anticipated market value at the time of the issue -Establishes amount due to preferred stockholders in the event of liquidation -Determines the base against which the percentage or dollar return on preferred stock computed

Common stockholders claim to income

-Common stockholders have residual claim to income regardless of payment of dividends or retention by the firm -Do not have a legal or enforceable claim to dividends -A firm may have several classes of common stock outstanding that carry different rights to dividends and income

Justification for preferred stock

-achieves a balance in capital structure -drawback is that dividend payments are not tax-deductible A mean of expanding with the capital base without: -Diluting the common stock ownership position -Incurring contractual debt obligations

Following stipulations and provisions define preferred stockholder's claim to income and assets

-cumulative dividends -conversion feature -call feature -participation provision -floating rate -auction rate preferred stock -par value

Comparing common and preferred stock and debt

-highest return and risk is associated with common stock -Preferred stock generally pays lower return (due to 70% tax exemption for corporate purchasers)

The voting right, Common stockholders have the right to:

-vote in the election of board of directors -Vote on all other major issues -Assign a proxy or "power to cast their ballot" (Companies can have different classes of common stock with unequal voting rights)

With common stock when do stockholders have a claim on income?

After creditors and preferred stockholders have been satisfied