Chapter 1

Capitalization = Stock + Retained Earnings + Debt

Equity aka common stock in a corporation
Authorized Stock – Total Amount of Authorized Shares or permitted file
application within In the state for a charter
Treasury Stock - stock that was issued to shareholders but bought back by the
corporation no voting rights or dividends it is in the company treasury company
buys back stock when believed stock is undervalued or pension use
Outstanding Stock – is outstanding stock less tresuary stock
Example: 1 million shares authorized
400,000 shared issued stock
100,000 treasury stock
300,000 outstanding shares
600,000 not issued (authorized but not issued stock )
Par Value is the price set by the corporation and is usually a very low price 1$,
one cent no relation to book or market value Two accounts are created par
value and capital surplus accounts both are available to fund the business
Book Value is the estimated amount of all assets belonging to the corporation in
the event of business ceasing. (Theoretical liquidating)
Market Value current price a investor can pay to purhchase a business or buy
shares of stock on the open market
RIGHTS OF COMMON STOCKHOLDERS decision to declare any type of
dividends is the decision of the board of directors not shareholders
Right to dividends declared and paid quarterly sharedholder receives what they
earn Example 1 $ dividend declared 100 shares owned = 100 dollars
Not all earnings are paid out as dividends can be held as retained earnings these
earnings increase shareholder equity and company assets
Not all dividends in cash some dividends cane be paid in property/ or subsidiary
stock
Stock dividend VS. Stock Split
Stock dividend a distribution of additional shares of own company stock
Board of directors declares 10% stock dividend an investor who owns a 100 will
receive 10
Stock Split when a 3-1 stock split declared an investor will receive 2 shares for
everyone owned at the time of split the price of the shares will divided into 3 also
the par value must be divided by three. The lower price makes shares affordable
to a wider group no tax liability to current shareholders
Preemptive Rights
If corporation wants to issue more stock current shareholders get to buy those
new shares first Example a shareholder who owns 5% is allowed to maintain that
5% ownership once the new stock Is issued w/out this right the total owernship
would diminish or dilute. This is called a rights offering these rights have valued
and are considered equity securities. THESE ARE SELLABLE
Common Stockholders Rights
Voting Rights can be exercised at the annual stocker holder meeting for the
persons who will sit on the board, board will elect company management. Also
common stockholders have the right to vote on major corporate matters,
mergers, stock splits,
Some companies offer stock with limited or no voting rights
Proxies can be used mail ballot
Statutory Voting = one vote/share owned with this method of voting a
shareholder with an majority in the corporation can greatly influence the board of
directors
Cumulative Voting is conducive for minority interest shareholders each
shareholder gets one vote = one share X number of board seats a investor
with100 shares gets 500 hundred votes with 5 open seats. The key to this is one
shareholder can use all votes on one candidate
*Statutory Voting votes must be spread around to different candidate
cumulative can be collective
Additional Rights & Advantages
1.Inspect Records has the right to inspect the corporations books and records
does not happen often SEC requires audited information sent out
2. Transferability Stockholders have the right to transfer shares to anyone they
want “Negotiable Securities” bought repeatedly
3. Limited Liability investors who own stock are not responsible for company
debt, the only potential is their own equity in the investment
4. Continuity – the permanence of continuation, the corporation in theory can go
on indefinitely
Preferred Stock “senior security” same as common stock but w/ 2 preferences
dividend preference and liquidation preference
Dividend Preference when a dividend is declared preferred stockholders
receive theirs before common stockholders. Even during the years when the
company only has enough to pay preffered common gets nothing
Fixed Dividend a fixed dividend is paid regardless of value unless the company
does poorly the fixed can be omitted
*Preferred benefits from known return rates and being paid before common
Straight Vs Cumulative Preferred Stock
Straight is no dividend is declared for that year the shareholder gets nothing
Cumulative if no dividend is declared then that dividend is put in arrears,
eventually it must be paid off before any to common stockholders
Participating preferred when the shareholder has rights to receive both the
fixed and a possible additional dividend shared with the common
Liquidation Preference / Bankruptcy Preference
1. Secured Bondholders
2. Any unpaid wages or taxes
3. General Creditors, including unsecured bondholders
4. Preferred Stockholders
5. Common Stockholders
*First 3 creditors last 2 owners
No Voting Rights for preferred stock this is the tradeoff
Tax Incentive Corporations can exclude gross income of 70% of dividends on
preferred and if the company owns 20% or more of one company the exclusion is
80%
Convertible Preferred shareholder has the right to convert preferred to common
at a set price set at the time of preferred stock issuance usually above market
value Conversion price “Strike Price”

Conversion Ratio this is set by issuer when selling the preferred stock preferred
stock is usually set a par $100

Par Value = Conversion Ratio

Conversion Price

Parity Price involves determining if the switch is economical for the investor the
price at which common equals preferred is Parity

Parity Price of Common = Market price of preferred

Conversion Ratio

Parity Price of Preferred = (Market Price of common) X (Conversion Ratio)

Conversion Price = Par value of Preferred Stock

Conversion Ratio

Callable Preferred corporation has the right to repurchase at specific price after
a set date usually at par value incentive when interest rates fallen if the investor
does not sell back that stock is terminated
Interest Rates influence price of preferred stock as the market price rises the
price of preferred stock falls to calculate this exact price of the preferred stock

Current Yield = Annual Dividend

Current Market Price
When yield is high price will be low
When price is high yield will be low
Current Market Price = Annual Dividend
Current Yield
Bonds are debt securities bondholders are lenders
Bond indenture/Trust indenture legal document stating terms and conditions of
a loan
Par value is usually $1,000 and stated interest rate
Coupon Rate is the interest rate expressed as a percentage of the bonds face
value
Maturity Date that specified date when the principal of bond must be repaid this
in turns brings Bond Redemption
Sinking Funds Way to retire Bonds periodic payments are made to a trustee
until maturity and require this to happen to random bonds each year
Bonds can be callable when this occurs and a call premium must be offered
on top of face value
Bond refunding when interest rates drop the bonds will be called and new
issued at a lower rate
Secured Bonds this is a bond back by a specific pledged asset as collateral
these include mortgage, Equipment, and Collateral Trust Fund, these assets
are in the form of a portolio issued by other companies
Unsecured bonds are just the opposite aka debentures (promissory notes)
Subordinated debentures are below regular debentures
Income Bonds is bond to replace outstanding debt, these are issued when a
company is close to bankruptcy the receivers perceive return by keeping the
company alive
U.S Government Securities considered safest
Two types of debt marketable and non marketable
Series EE and Series HH non marketable
Smaller denominations
HH Bonds are higher denominations
Call = Buy
Put = Sell
* A Security
Mortgage Backed Securities (pass through) 1930’s developed to expand
secondary mortgage market
Federal National Mortgage Association (FNMA – Fannie Mae) first mortgage
association established by congress to expand the secondary market for Federal
Housing and Veterans Administration designed to buy and sell mortgages
backed by these agencies
Government National Mortgage Associationc (GNMA Ginnie Mae) 1960’s
created to take over some responsbilites of the FNMA. GNMA intended to bring
in instituitioan investors into the mortgage marketed. GNMA created mortgage
backed or pass-through security *payments guaranteed by United States
Gov’t