Corporate Finance ch15 - CHAPTER 15 Long-Term Financing What do Microsoft Lexmark and Mesa Air Group have in common In 2008 or early 2009 all three

Corporate Finance ch15 - CHAPTER 15 Long-Term Financing...

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CHAPTER 15 Long-Term Financing: What do Microsoft, Lexmark, and Mesa Air Group have in common? In 2008 or early 2009, all three companies made announcements that would alter their balance sheets. Microsoft, for example, announced it would repurchase $40 billion of its shares. To pay for the repurchase, the company used about $8 billion it received from issuing debt. What was so interesting is that this was the first time Microsoft had ever issued long-term debt. Given the relatively small size of the debt issue, Microsoft’s bonds were given a AAA rating, one of only 14 corporate AAA ratings worldwide. As for Lexmark, manufacturer of printers, the company announced it would issue $650 million in new debt. At the same time, the company announced the repurchase of $750 million of its common stock. Mesa Air Group did exactly the reverse. In this case, the company received permission from its shareholders to increase the number of its shares outstanding from 75 million to 900 million! The reason for this enormous increase in equity was to repurchase the company’s debt. The company had two outstanding bond issues, one of which matured in 2023 and the other matured in 2024, which had an interesting feature. Both of these bond issues gave bondholders the right to force the company to buy back the bonds in 2009. Given the then-current bond market conditions, company management felt that the best option was to issue new equity to repurchase the bonds rather than issue new bonds. So, why did Microsoft and Lexmark decide to swap debt for equity while Mesa Air Group swapped equity for debt? We will explore this question and other issues in this chapter. 15.1 Some Features of Common and Preferred Stocks In discussing common stock features, we focus on shareholder rights and dividend payments. For preferred stock, we explain what the “preferred” means, and we also debate whether preferred stock is really debt or equity. Common Stock Features The term common stock means different things to different people, but it is usually applied to stock that has no special preference either in receiving dividends or in bankruptcy. Shareholder Rights The conceptual structure of the corporation assumes that shareholders elect directors who, in turn, hire management to carry out their directives. Shareholders, therefore, control the corporation through the right to elect the directors. Generally, only shareholders have this right. Directors are elected each year at an annual meeting. Although there are exceptions (discussed next), the general idea is “one share, one vote” ( one , one vote). Corporate democracy is thus very different from our political democracy. With corporate democracy, the “golden rule” prevails absolutely. 1 Directors are elected at an annual shareholders’ meeting by a vote of the holders of a majority of shares who are present and entitled to vote. However, the exact mechanism for electing directors differs across companies. The most important difference is whether shares must be voted cumulatively or voted straight.
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