INVESTMENTS

Objectives• To know the different instruments where an investor

can invest

• To distinguished Bonds from Stocks

• To describe and illustrate the nature of investing through form of Bond and/or Stocks

Why Company Invest?Most companies generate cash from their operations.

This cash can be used for the following purposes:

1) Investing in current operations2) Investing in temporary investment to earn additional

revenue3) Investing in long-term investments in stock of other

companies for strategic reasons

Investing Cash in Current Operations

Cash is often used to support the current operating activities of a company. There will come a time worn-out equipment has to be replace, or one company might decide to expand by opening new stores.

The company need cash in these activities and it is important that they have saved cash for these.

Investing Cash in Temporary Investments

Instead of letting excess cash remain idle in a checking account, most companies invest their excess cash in temporary investment.

Primary Objectives are:• Earn interest revenue• receive dividends• realize gains from increases in the market price of the

securities

Investing Cash in Long-Term Investments

A company may invest cash as a long-term investment also, such investments usually have a strategic purpose.

• Reduction of costs• Replacement of management• Expansion• Integration

Two Types of Securities• Debt Securities (Bonds)– Notes and bonds that pay interest and have a fixed

maturity date• Equity Securities (Stocks)– Preferred and common stock that represent

ownership in a company and do not have a fixed maturity date.

Video about bonds and stocks

Bonds• an instrument of indebtedness of the bond

issuer to the holders• a debt security, under which the issuer owes

the holders a debt and, depending on the terms of the bond, is obliged to pay them interest and/or to repay the principal at a later date, termed the maturity.

• Debtor – creditor relationship

Features of a Bond• Principal– Nominal, principal, par or face amount is the

amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term.

Features of a Bond• Maturity– The issuer has to repay the nominal amount on

the maturity date.– The length of time until the maturity date is often

referred to as the term or tenor or maturity of a bond.

Features of a Bond• Coupon– The coupon is the interest rate that the issuer pays

to the holder.– Usually this rate is fixed throughout the life of the

bond.

Features of a Bond• Yield– The yield is the rate of return received from

investing in the bond.• Current Yield - simply the annual interest payment

divided by the current market price of the bond.• Yield to Maturity - which is a more useful measure of

the return of the bond, taking into account the current market price, and the amount and timing of all remaining coupon payments and of the repayment due on maturity.

Features of a Bond• Market Price– The market price of the bond will vary over its life.• At a Premium - above par, usually because

market interest rates have fallen since issue.• At a Discount – price below par, if market rates

have risen or there is a high probability of default on the bond

Stocks

• Stocks are share of ownership of a corporation• Stockholders or shareholders are the owner of the

stock, and also owns the corporation

Stock Certificates

• Public corporations- Corporations whose shares of stock are traded in

public markets• Non-public or Private corporation

- Corporations whose shares are not traded publicly and usually owned by a small group of investors

Stockholder’s Equity• Also called shareholders’ equity, shareholders’

investment, or capital.

2 Main Sources:

1) Paid-in capital (contributed capital) – capital contributed to the corporation by the stockholders

2) Retained Earnings – Net income retained in the business

2 Types of Stock:

1) Common Stock (Capital Stock) – if there is only one stock issued by the corporation

2) Preferred Stock – a class of stock with preferential rights over common stock

Types of Preferred Stocks:

1) Cumulative Preferred Stock – stock that has right to receive regular dividends that were not declared (paid) in prior years.

2) Noncumulative Preferred Stock – stock that don’t have the right to accumulate in the next years

3) Participating - A type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition.

4) Non-participating - A preferred stock that entitles the holder to a flat dividend and nothing else.

Par ValueStocks can be issued or sold for a price more than its

par (Premium) or less than its par (Discount)

No-par preferred and common stock may also be issued.

No-par stock may be assigned a stated value per share. It is recorded like a par value.

Treasury Stock

- The portion of shares that a company keeps in their own treasury. Treasury stock may have come from a repurchase or buyback from shareholders; or it may have never been issued to the public in the first place. - These shares don't pay dividends, have no voting rights, and should not be included in shares outstanding calculations.

Dividends3 Dates included in a dividend announcement:

1) Date of Declaration – when BOD formally authorizes the payment of the dividend. On this date, corporation incurs liability to pay the amount of dividend.

2) Date of Record – date of the corporation uses to determine which stockholders will receive the dividend.

3) Date of Payment – date the corporation will pay the dividend to the stockholders who owned the stock on the date of record.

Cash Dividends

- A cash distribution of earnings by a corporation to its shareholders- Most common form of paying dividends

Stock Dividends

- Distribution of shares of stock to stockholders.- It is normally declared only on common stock and issued to common stockholders

Retained Earnings StatementSeparate Retained Earnings Statement:

Restrictions in Retained Earnings1) Legal – state laws may require a restriction of

retained earnings2) Contractual – a corporation may enter into

contracts that require restrictions of retained earnings

3) Discretionary – a corporation’s board of directors may restrict retained earnings voluntarily

Statement of Stockholder’s Equity• When a corporation also has changes in stock and

paid-in capital accounts, this statement is prepared

Stock Splits• Process by which a corporation reduces the par or

stated value of its common stock and issues a proportionate number of additional shares.

• It applies to all common shares including the unissued, issued, and treasury shares

• Its objective is to reduce the market price per share of the stock, which will attract more investors and broadens the types and numbers of shareholders

4 shares, $100 par - $400 total par value

20 shares, $20 par - $400 total par value

Before Stock Split After 5:1 Stock Split

Financial Analysis and Interpretation• Earnings per common share (EPS) sometimes called

basic earnings per share• it is the net income per share of common stock

outstanding during a period.

Earnings per share = Net income – Preferred Dividends Average number of common shares outstanding

Group 22CFM

Elefante, ShaniaLim, MichelleLugue, RickieNaval, VernaRamos, Mara

Sources:

• Accounting Principles Using Excel for Success. Reeve, Duchac and Warren.

• http://www.investopedia.com• http://en.wikipedia.org/