chapter 15 - Chapter 15: Long-Term Financing: An...

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Chapter 15: Long-Term Financing: An Introduction Ken Seng Tan Actsc 372 Fall 2011 Actsc 372-F11 Chap. 15 2 Chapter Outline ± Long-term Financing Sources: ± Common Stock ± Long-Term Debt ± Preferred Stock ± Patterns of Financing ± Summary and Conclusions Actsc 372-F11 Chap. 15 3 Common Stock ± Authorized versus Issued Common Stock ± Shareholders’ Rights ± Classes of Shares ± Dividends ± Par and No-Par Stock ± Contributed Surplus ± Retained Earnings ± Market Value, Book Value
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Actsc 372-F11 Chap. 15 4 Authorized vs. Issued Common Stock ± The articles of incorporation must state the number of shares of common stock the corporation is authorized to issue. ± The board of directors, after a vote of the shareholders, may amend the articles of incorporation to increase the number of shares. ± Authorizing a large number of shares may worry investors about dilution because authorized shares can be issued later with the approval of the board of directors but without a vote of the shareholders. Actsc 372-F11 Chap. 15 5 Shareholders’ Rights ± The right to elect the directors of the corporation by vote constitutes the most important control device of shareholders. ± Directors are elected each year at an annual meeting by a vote of the shareholders ± The exact mechanism varies across companies. ± The important difference is whether shares are to be voted “ cumulatively” or voted “ straightly” . Actsc 372-F11 Chap. 15 6 Cumulative vs. Straight Voting: Example ± Imagine a firm has two shareholders: A & B ± A owns 600 shares of the firm and B owns 400 shares. ± Both A and B want to be on the board of directors. ± Assume there are three directors to be elected and each shareholder can have up to 3 nominations ± Under straight voting , A may cast 600 votes for each nomination while B may cast 400 votes for each ± Implication? ± Under cumulative voting , B has 1,200 votes (= 400 shares × 3 seats) and A has 1,800 votes. ± Each shareholder can distribute these votes over one or more of their nominations. ± Implication?
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Actsc 372-F11 Chap. 15 7 Cumulative versus Straight Voting ± In straight voting , shareholders have as many votes as shares and each position on the board has its own election. ± A tendency to freeze out minority shareholders. ± Under cumulative voting , if there are N directors up for election, then 1/(N+1) percent of the stock plus one share will guarantee you a seat. ± With cumulative voting, the more seats that are up for election at one time, the easier it is to win one. ± The effect of cumulative voting is to permit minority participation. Actsc 372-F11 Chap. 15 8 Proxy Voting ± A proxy is the legal grant of authority by a shareholder to someone else to vote his or her shares. ± For convenience, the actual voting in large
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This note was uploaded on 01/04/2012 for the course ACTSC 372 taught by Professor Maryhardy during the Fall '09 term at Waterloo.

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chapter 15 - Chapter 15: Long-Term Financing: An...

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