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Unformatted text preview: Owner Issues:
Acquiring Financial Capital
Acquiring You are the single owner of a sheep
farm on a small island . . . One day you make a sweater from the wool. People like it and start asking if they can buy one. You want to make more sweaters but don’t have the $20,000 to invest in the needed machinery. What form of business ownership is
5. 0% 0% 0% 0% 0% Ca
l 2. Sole Proprietorship
Can’t tell So
n 1. How should we get the $20,000 to buy
Debt Financing Ge
ta 0% Se
er 0% di
. 0% .. selling ownership Bo
ow 4. a. 3. fro
m 2. Borrow from a bank. Loan
Borrow directly from Direct Borrowing
Get a partner
Equity or Sell Stock Bo
ow 1. What information will the bank want to know
about you before it makes the loan? How much profit do you make? How much cash do you have to pay your bills? Income Statement: Sales – Expenses = Profits Cash Statement: Cash from Operations +/ Investments +/ Financing
Can’t pay with profits – Very important and underrated statement What you own an who you owe it to? Balance Sheet: Assets = Liabilities + Equity
What you own = owed others + owed to yourself Types of Financing Companies typically secure financing two ways:
→ issuing ownership shares (equity) Take a partner Form a corporation and sell share Riskier (paid last) therefore usually more expensive Generate profits internally (Net Income = Retained Earnings) → borrowing money (debt)
Get a loan Sell bonds Hierarchy of Investor Claims or “Who gets
paid back first”
Risk / Return
Secured Debt (has an asset as collateral) Unsecured Debt (on “good name”)
Preferred Stock 1.
• Trade Off
Risky Return Paid a dividend before any common stock dividends are paid.
No voting rights.
Can be convertible to common stock. Common Stock 1.
• Entitled to a share of residual profit
Riskiest investment so usually most expensive financing. More
Return Review the following slides for the
exam that were not covered in class. Equity as a Source of Capital Stock is the equity ownership of a corporation.
A share is a portion of a corporation’s stock.
Owners of shares are shareholders. Also called:
Stockholders Investors Owners Voting rights: shareholders elect board of directors. Limited liability: limitation on the liability of owners. The most owners can lose is their investment. Common stock is the residual ownership of the firm (keep what is left). Characteristics of Stock
Stock ownership: Public corporation: shares can be bought and sold in public securities markets Private corporation: a firm with few owners; shares cannot be bought and sold publicly. Debt as a Source of Capital
Debt as a Source of Capital
Debt Debt: the amount borrowed by one party (debtor) from another party (creditor).
Amount borrowed is the principal and compensation and compensatio
for use of the funds is the interest.
Debt may be backed by specific property (secured)
or backed by the general creditworthiness of the borrower (unsecured).
Can be in the form of loans or bonds. Debt as a Source of Capital
Debt as a Source of Capital
The good and bad of using debt: 1. Tax deductibility of interest (+) 2. Debt does not dilute control of the firm (+) 3. Lower cost of funds (+) 4. Increases probability of financial distress () 5. Uses up potential debt capacity () Bonds
• Corporations and governments borrow money by issuing bonds.
A bond’s denomination is the amount of indebtedness (par value).
• Corporate bonds are typically $1,000 (also called the principal).
Interest is paid on the amount borrowed until the funds are repaid. A bond’s maturity can vary. Bonds with maturities over 30 years are rare.
• Components of
State Charter Owners
President, CEO, CFO, etc. Employees •Middle Management,
•1st level managers
Shareholders The “Corporation” Board of Directors
Board of Directors
Employees Note: Management hired by the Board are usually considered Owners. Separation of Ownership and Control
Precorporate Period Corporate Period
Managers Board of
Management Do you remember which stakeholder views do these represent? The Agency Problem
Agent acts for the principal Problems with agency relationship Excessive “perks” Shirking Agents act in own best interest Efforts to Improve
Corporate Governance Changes in boards of directors
» “Outside” directors
- Non employed by the company
» “Independent” directors
- Not employed by the company
- Not doing business with the company
- No relatives working for the company
» Stronger board committees
Establish board committees
» Compensation Efforts to Improve
Corporate Governance Building a better board » Define the role of the board
» Have explicit financial goals
» Widen the talent pool for directors
» Encourage constructive dissent Financing & Risk Q&A Any Q’s?
I have a couple?
Make sure to reread the article for the exam. Reading 6.14 – A Primer on
Sarbanes-Oxley A Primer on SOX
3. 1. Public Company Accounting Oversight Board (PCAOB, but called “PeekaBoo”)
Corporate Governance “Independent” “Outside” directors on audit committee Financial expert on audit committee CEO and CFO certification
Enhanced Financial Disclosures
5. NonGAPP EBITDA accounting & offbalance sheet transactions Sales of stock disclosures
404 Internal controls certification Stock Analyst Conflict of Interest
Commission Resources and Authority
Increased penalties and Whistle Blower Protection
New Sentencing Guidelines & Penalty Enhancements Efforts to Improve
Corporate Governance SarbanesOxley Act of 2002
» Limits non-auditing services of auditors
» Enhances financial disclosure
» CEOs and CFOs certify financials
» Protects whistle-blowers
» Code of ethics disclosure
Government regulation to protect owners by providing
more complete, transparent information about the
financial health of publicly traded companies. Issues Surrounding Compensation CEO Pay Controversy
» Whether CEO pay is tied to
» Overall level of CEO pay ...
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- Fall '08