CHAPTER 7CORPORATE STOCKS

stock financingtypes of stocks

2 PRIMARY SOURCES OF LONG TERM FUNDS

1. Stock2. Bond issues of corporation

Stock financing – refers o raising of funds through the sale of a firms shares of stock, or increase in equity capital.

smaller firms – stock financing means only raising sizeable amounts of capital for long term use.

Capital Stock – refers to the aggregate ownership of a corporation.

share of stocks – smaller unit of capital stock.

ILLUSTRATION:Bernal Consolidated Industries

Capital Stock : 40,000,000

Articles of Incorporation : 4,000,000 (divided into smaller

unit)

Par Value : P10 (per unit)

Availability amount able to share : 2,000,000 (shares)

Paid up capital : 20,000,000 (represent actual investment in

money)

SHARES OF STOCKS HAVE 3 BASIC CHARACTERISTICS

1. they are negotiable2. entitled to receive dividends3. ownership is evidenced by certificate of

stock ( issued when they are fully paid

DIVIDENDS

profit on stock investment are in form of dividends

one of the obligation of corporation to stockholders

payments is not fixed obligation its contingent upon the availability of

accumulated net earnings declaration of board of directors if the

dividend should be paid out

consideration before paying dividend board allocates net earning There may be a need to accumulate

sinking funds for long term debt. Funds maybe earmarked for proposed

or on going projects. Firm follow a policy of retention of a

portion of net earnings for reinvestment.

Not all earnings are paid out as dividends to stockholders.

FORMS OF DIVIDENDS

1. Cash2. Stocks3. Bonds4. Scrip5. Property

Cash – management would like to utilize the funds for other purpose

Shares of stocks or bonds

Scrip – may also be paid as dividends - this sort of a warrant, option or

certificate entitles the holders to collect either cash, stocks or bonds from the company at some future date.

Property – forms of goods, or shares owned by company but issued by other corporation.

ACQUIRING STOCKS Investors acquire unissued stocks by subscription and issued stocks by purchase

Subscription – a contract entered into by an investor to buy a certain number of unissued shares at agreed price.- buyer become stockholder

- he is entitled of the full value of his shares even if they are only partially paid.

ILLUSTRATION:

A – 100 shares (10,000 par value) = 1,000,000 value

B – down payment 20 shares (80 shares left) = certificate upon payment of shares will given the entitlement of 100% shares of stock will be issued upon full pay.

CAPITAL STOCK STRUCTURE

Authorized capital stock – the aggregate amount of capital, either in monetary terms or in numbers of shares, stated in the articles of incorporation.

Unissued stock – the portion of the authorized capital stock, or an additional issue, which has not yet been subscribed to or purchased and therefore remains with the corporation.

Issued capital – refers to stocks already subscribed to or issued, whether partly or fully paid for, which are in the hands of outsiders or reacquired by the corporation.

Outstanding Capital Stock – includes all issued stocks fully or partially paid for which are currently held by outside stockholders other than the issuing corporation.

Treasury stocks – shares with have been issued and fully paid for but are reacquired by the issuing corporation through repurchase, gifts or donations.

TYPES OF SHARES OF STOCK Shares of stocks, just like any

commodity, are bought and sold in a market, the securities market.

To promote their marketability, issuing companies cater to the whims, preferences, and even idiosyncracies of the investing public.

Investors focus their interest on three primary aspects of their investments income, risk, and control.

COMMON AND PREFERRED

Shares of stocks are generally classified into common stocks and preferred shares.

Both types are transferable and are entitled to dividends.

Stockholders of both enjoy the fundamental rights of stockholders.

THEIR MAIN DIFFERENCES ARE:

1. Common stocks represents equity or the permanent capital of the firm. Preferred stock is of doubtful investment status. Modern finance relegates preferred shares to the category of debt instruments rather than permanent investments.

2. Common stocks have voting rights in the election and removal of the directors, a right generally denied preferred shares.

3. Preferred stocks have special privileges to compensate for the restrictions on its voting rights, commonly in priority to the earnings and assets over common shares.

4. Preferred shares have fixed dividend rates. Dividends to common stocks depend upon the amount declared available to common stocks.

COMMON STOCKS

Common stocks represents the permanent equity capital in a corporation.

They exercise the managerial prerogatives of owners but are subject to the constraints of ownership.

They elect and remove the members of the board of directors.

CLASSIFIED COMMON STOCKS A number of corporations may

differentiate their common stocks for various purposes.

The most common reason is to comply with nationality requirements.

There are cases when a corporation may wish to restrict the voting privileges or dividend rights of some common stocks.

Limitations imposed on the rights or transfer of common shares are written on the certificate of stocks.

Classes “A” and “B” – The Private Development Corporation of the Philippines (PDCP) classifies its common stock into Class “A” and class “B”.

- Both classes of stocks have the same privilege except for restrictions on the nationality of the buyers and their voting rights.

Class “A” – shares may only be purchased by Filipinos and entities of which 60% of the capital is owned by Filipino citizens. - Holders of class “A” stock may elect eight Filipino directors of the company.

- These directors must also be holders of Class “A” shares. - The Philippine National Bank is granted the right to nominate one class “A” director.

Class “B” – stock is open to all investors, regardless of nationality.- Holders of class “B” shares are entitled to elect three of the eleven directors.- These directors must be holders of class “B” stocks.- The Filoil Refinery Corporation(now Philippine National Oil Company) issued two classes of common stock, class “A” and class “B”.

TWO CLASSES OF COMMON STOCK, CLASS “A” AND CLASS “B” Class “A” – common shares have no

voting rights except in those matters where the corporation law requires participation. But they have preferential features as to dividends much like those given to preferred shares.

- Class “A” shares are entitled to 4% dividends before any class “B” shares are paid at the same rate.

- If there is a remainder, the class “A” share shall be paid another 4% dividend. Any balance left goes to class “B” shares

Class “B” – shares are given full voting rights.- Class “A” shares are given temporary voting rights only if the board of directors fails to declare dividends for three consecutive years. - Such power is automatically removed upon payment of preferred dividends for one fiscal year.

PREFERRED STOCKS

Shares which, in addition to the usual rights of stocks, are given special preferences.

Generally, preferred shares have priority over common shares in the distribution of dividends or in the allocation of proceeds of assets in the event of a dissolution.

Preferential claims over dividends and over assets become significant where the company’s dividends or assets are not sufficient to satisfy legitimate claims of all types of shares.

Participating and non-participating A share of stock is said to

participating when, in addition to a preferential rate of dividend it receives, it is allowed to share with the common stock in the remaining dividends.

Cumulative and non-cumulative Cumulative stocks are entitled to

dividends even for periods where no dividends have been declared.

- Payment for dividends in arrears, the unpaid dividends of past periods, are paid ahead of current dividends.

Non-cumulative stocks, there are stipulations which modify the limitations to dividends for non-cumulative shares for periods where net earnings are nil.- It may be provided that the non-cumulative shares are not entitled to dividends for periods where there are no earnings.

Callable or redeemable shares These are stocks which are subject

to redemption or recall, or simply repurchase by the issuing corporation.

Callable shares of the “optional” variety are redeemable at the option of the company, in other words, stockholders may not force redemption of such shares.

Redemption prices differ, the price is usually above the purchase or par value price of the shares.

Sinking funds for redemption Funds used for the repurchase, of redeemable

shares are required to come from the earnings of the issuing company

As a matter of good business policy, the corporation maintains a sinking fund for redemption purposes.

Convertible stocks These are shares which, at the option of the

stockholder, may be exchanged with other securities of the issuing company.

The most usual form of conversion is from preferred to common stocks which once made, there may be no reconversion.

Diversification and dilution The conversion privilege is an

opportunity for the investor to diversify his investment.

The stockholder could take advantage of a favorable climate for the other types of securities to which they are convertible.

Dilution a conversion feature is for the purpose of increasing the sale ability of the stocks, protection against dilution or rendering worthless the conversion privilege may be stipulated.

OTHER STOCK FEATURES

Guarantee The dividend payments of guaranteed

stocks are guaranteed by a company other than the issuing corporation.

A corporation may not guarantee the dividend payment of its own stock.

For example, Filipina Biscuit Corporation may issue guaranteed preferred shares the dividend payment of which are guaranteed by the Republic Cement Corporation.

Par value A share of stock with an assigned nominal

value stated on its face is a par value stock.

No par value Shares are stocks without the nominal

value stated on its certificate. “No par value” shares do not have a fixed

value in monetary terms. The authorized capital stock of the

company issuing no par value shares is stated in terms of number of shares.

Deferred stocks refer to shares where dividend

payments are subject to the occurrence of a contingent event or the lapse of a specified period.

Stocks receive their dividend whenever declared by the board of directors.

Stock Purchase Warrants An instrument which gives the holder

an option to purchase the shares of the company within a specified period

and usually at a stipulated price.

Founder’s shares There are stocks which are

granted to the incorporators or original organizers of the corporation.

They confer to the holders an extraordinary participation in the profits when the corporation is successful.