Financing the Corporation

Chapter 10

Introduction

• Capital is the lifeblood of businesses, and this is as true for sole proprietorships as it is for huge, multinational corporations.

Financing of the Corporation

• The money that the corporation generates by the sale of shares gives it the capital that it needs to function.

Financing of the Corporation

• A share is the smallest unit that represents corporate ownership.

• Share is the general term used to describe how the corporation is financed. Stock represents a stockholder’s financial interests and voting rights.

Financing of the Corporation

• The articles of incorporation and corporate bylaws specifically control who can issue stock.

Financing of the Corporation

• Common stock is the stock that a company issues in order to raise capital.

Financing of the Corporation

• Preferred stock usually does not provide voting rights to its owners.

Financing of the Corporation

• Controlling stock refers to the stock owned by a specific stockholder that amounts to a majority interest in the corporation.

Financing the Corporation

• Convertible stocks give the owner the right to change the stock into another category.

Financing of the Corporation

• The origin of par value lies in the idea that there should be an untouchable corpus of funds acting as a reserve for the corporation.

• If there is no par value for stock, stock value can be set by the stockholders or by the board of directors.

Financial Disclosures

• Financial statements primarily show the status of corporate assets.

• Financial statements consist of four main reports:

Balance sheets

Income statements

Cash flow statements

Statement of Shareholder Equity

Financial Disclosures

• Balance sheets provide a snapshot of corporate assets as of a particular date.

Financial Disclosures

• Income statements show how the corporation made and spent money over a particular period of time, such as the fiscal year.

Financial Disclosures

• Cash flow statements show how the corporation used its capital during a specific time period.

Financial Disclosures

• The statement of shareholder equity details the ebb and flow of the shareholder’s stock possession over time.

• Shareholder equity is that amount that would be left over if everything the corporation owned were sold.

Sales of Stock

• A corporation is authorized to sell its own stock, as long as it acts in good faith. Examples of bad faith include selling stock to avoid creditors or judgments.

Sales of Stock

• A security is broadly defined as stocks, bonds, notes, and any other investment vehicle.

• Because securities form such an important part of the economy, they have been regulated in this country for over a century.

Sales of Stock

• The SEC’s Division of Corporate Finance is responsible for ensuring that investors receive the information necessary to make informed decisions about stocks and other securities.

Sales of Stock

• The first federal laws that regulated securities came about because of the financial disaster of the Great Depression.

Corporate Bonds

• Issuing stock is not the only method that a company can use to raise money. Another method is to issue bonds to investors.