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1、Chapter McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Common and Preferred Stock Financing 17 1-2 Chapter 17 - Outline Common Stock The Voting Right Rights Offering “Rights-on” and “Ex-rights” Poison Pill Preferred Stock Provisions Associated with Preferred
2、 Stock Risk and Expected Return Summary and Conclusions PPT 17-2 1-3 Common Stock Stockholders - Ultimate owners of a firm Legally, stockholder directly controls the business A large creditor may have the power to exert pressure on the firm to meet certain financial performance standards 1-4 Preferr
3、ed Stock Plays a secondary role in financing the corporate enterprise Represents a hybrid security by combining some of the features of debt and common stock Stockholders do not have an ownership interest in the firm Stockholders have a priority of claims to dividends superior to that of common stoc
4、kholders 1-5 Common Stockholders Claim to Income Common stockholders have a residual claim to income These funds can be paid out as dividends or retained by the firm They do not have a legal or enforceable claim to dividends A firm may have several classes of common stock outstanding that carry diff
5、erent rights to dividends and income 1-6 Institutional Ownership of U.S. Companies 1-7 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
6、 of common stock with unequal voting rights Such as “founders shares” Bondholders and preferred stockholders may vote: If a corporate agreement has been violated 1-8 The Voting Right Proxy: assigning shareholders right to vote to another individual Majority Voting: all directors must be elected by a
7、t least 51% of the vote doesnt allow minority shareholders representation on the board of directors Cumulative Voting: a shareholders votes can all be used to elect 1 person allows minority shareholders representation on board PPT 17-4 1-9 Cumulative Voting Process To determine the number of shares
8、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 directors that can be elected can be determined: 1-10 The Right to Purchase New Shares Holders of common stock must be given the first
9、 option to buy new shares Ensures that management cannot subvert the position of present stockholders 1-11 The Use of Rights in Financing Used by many U.S. companies and is popular as fund raising method in Europe Questions to consider: How many rights should be necessary to purchase one new share o
10、f stock? Rights required Stockholders may choose to sell their rights, rather than exercise them in the purchase of new shares 1-12 The Use of Rights in Financing (contd) What is the monetary value of these rights? Monetary value of a right two terms When a rights offering is announced a stock initi
11、ally trades rights-on The 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 purchase a new share of stock; Me = market value when trading ex-rights. Ex-rights when you buy a share the
12、re is no right towards future purchase 1-13 Effect of Rights on Stockholders Position Option 1: Suppose Stockholder A owns 9 shares before the rights offering and has $30 in cash. His holdings would appear as: If he receives and exercises 9 rights to buy one new share at $30: 1-14 Effect of Rights o
13、n 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 rights or not, the stock will still go down a lower value. 1-15 Three options when presente
14、d with a rights offering Exercise the rights; no net gain or loss sell the rights; no net gain or loss allow the rights to lapse; a loss will be incurred due to the dilution of existing shares that is not offset by value of unsold or unexercised rights. 1-16 Poison Pills A rights offering made to ex
15、isting shareholders of a company Used to avoid a takeover Makes hostile takeovers very expensive and unattractive Allows existing shareholders the right to buy additional shares of the stock at a very low price 1-17 American Depository Receipts Certificates that have a legal claim on an ownership interest in a foreign companys common stock Also referred to as American Depository Shares (ADSs) Allows foreign shares to be traded in the United States much like common stock 1-18 Advantages of ADRs for the U.S. Investor Annual reports and financial statements
