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corporation. To do so, they often appoint
other vice presidents, as well as department
heads, who supervise all other employees in
their departments. Exhibit 7-3 on the next
page shows this structure.
Financing Corporate Activity All firms,
whether proprietorships, partnerships, or
corporations, can raise money by borrowing
from banks and other lending institutions.
Only corporations, however, have two other
avenues. They can sell bonds (sometimes board of directors
An important decisionmaking body in a corporation. It decides
corporate policies and
goals, among other
things. Section 1 About Business Firms 165 07 (154-185) EMC Chap 07 EXH I BIT 7-3 11/17/05 5:14 PM Page 166 Structure
Structure of a Typical Corporation
directors Secretary Treasurer Vice
head President Vice
president V ic e
head All other employees Stockholders occupy the top position in a corporation. They elect the
board of directors, which in turn chooses the corporation’s top officers
(the president and others). Why do you think the stockholders are
placed at the top of the corporate structure? referred to as issuing debt), and they can
issue (or sell) additional shares of stock.
Think of a bond as a statement of debt
issued by a corporation—an IOU, or piece
of paper on which is written a promise to
pay. For example, when AT&T issues a bond,
it is promising to pay a certain amount of
money at a certain time. Here is the process
1. Quentin buys a bond issued by AT&T in
the year 2006 for $10,000. The $10,000
is now in the possession of AT&T (the
corporation might use the money to
help buy new equipment), and the
bond (a piece of paper) is in the possession of Quentin.
2. The bond that Quentin has in his hands
has a few things written on it. For one
thing, it has a dollar figure written on it,
called the face value (or par value) of the
bond. We’ll say it is $10,000. The percentage written on the bond is called the
coupon rate of the bond. The coupon
166 Chapter 7 Business Operations rate is the percentage of the face value of
a bond that is paid out regularly to the
bondholders. For Quentin’s bond, we’ll
say the coupon rate is 8 percent. Finally,
a maturity date written on the bond is
the date the bond matures, or is paid off
by AT&T. We’ll say this date is 2016.
3. The bond is a legal promise that AT&T
makes to Quentin. The promise has two
parts. First, AT&T promises to pay the
face value of the bond at the maturity
date. Second, it promises to pay the
coupon rate, times the face value of the
bond, each year until the maturity date.
The coupon rate is 8 percent, and the face
value of the bond is $10,000; 8 percent of
$10,000 is $800, so Quentin receives $800
in the year 2006 and in each year through
2016. (This $800 is called the annual
coupon payment.) In 2016, Quentin
receives not only $800 but also the face
value of the bond, $10,000, because 2016
is the maturity date of th...
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This document was uploaded on 01/16/2014.
- Winter '14