Financing corporate activity all firms whether

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Unformatted text preview: e 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 Typical Corporation Stockholders Board of directors Secretary Treasurer Vice president Dept. head President Vice president V ic e president Dept. head Dept. head Dept. head Dept. head Dept. head Dept. 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 at work: 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.

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