Types of SecuritiesCommon StockSlide 3Slide 4Slide 5Slide 6Preferred StockCorporate DebtSlide 9Slide 10Slide 11Convertible SecuritiesPatterns of Corporate FinancingSlide 14Slide 15Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 1Types of SecuritiesEquityCommon stockPreferred stockDebtCommercial paperDebentures (bonds)Notes (loans)Bank financing (line of credit; term loan)Hybrid Convertible DebtCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 2Common StockAuthorized StockNumber of shares of common stock that can be issued by the companyIssued SharesShares that have been issued by the company.Outstanding SharesShares that have been issued by the company and are currently held by investors. (Note: treasury stock is shares that were issued and repurchased)Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 3Common StockAuthorized Shares Maximum number of shares that the company is permitted to issue, as specified in the firm’s articles of incorporation.Par ValueValue of security shown on certificate. Note: may be noneIssuance of SharesRequires approval of board of directors and shareholders.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 4Common StockBook Value of Equity: Par value + Capital paid in excess of par Retained EarningsTreasury StockBook Value vs. Market ValueBook value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. The market value of the firm is forward looking, it depends on the future value that shareholders expect to receive.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 5Common StockExample - H.J. Heinz Book Value vs. Market Value (4/2004)Total Shares outstanding = 352 million1,894Value)(Book equity common Net 546-Other2,928-costat sharesTreasury 4,857earnings Retained403capitalin paid Additional108par) ($.25 SharesCommonCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 6Common StockExample - H.J. Heinz Book Value vs. Market Value (4/2004)Total Shares outstanding = 352 millionbillion $13.376ValueMarket 352x shares of #$38/sh= priceMarket 2004 AprilCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 7Preferred StockPreferred Stock - Stock that takes priority over common stock in regards to dividends and liquidation. Dividends - Can be skipped at board’s discretion. Not a legal obligation that can lead to bankruptcy. Cumulative v. NoncumulativeFloating-Rate Preferred - Preferred stock paying dividends that vary with short term interest rates.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 8Corporate DebtNonrecourse Debt – If corporation does not pay its debt, the shareholders do not have to put extra money into the corporation. Instead, the debtholders put company in bankruptcy and take over the assets.“Default Risk” - describes the likelihood that a corporation will not be able to pay its obligations. “Bond Ratings” - are issued on debt instruments to help investors assess the default risk of a firm.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 9Corporate DebtPrime Rate - Benchmark interest rate charged by banks.Line of Credit – Loan where amount borrowed varies through life of loan.Callable Bond - Bond that may be repurchased by firm before maturity at specified call price.Sinking Fund - Fund established to retire bond before maturity.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 10Corporate DebtSubordinated Debt - Debt that may be repaid in bankruptcy only after senior debt is repaid.Secured Debt - Debt that has first claim on specified collateral (i.e., assets) in the event of default. Investment Grade - Bonds rated Baa or above by Moody’s or BBB or above by S&P.Junk Bond - Bond with a rating below Baa or BBB.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 11Corporate DebtEurodollars - Dollars held on deposit in a bank outside the United States.Eurobond - Bond that is marketed internationally.Private Placement - Sale of securities to a limited number of investors without a public offering.Protective Covenants - Restriction on a firm to protect bondholders.Lease - Long-term rental agreement. Is this debt?Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 12Convertible SecuritiesWarrant - Right to buy shares from a company at a stipulated price before a set date. This is an option, but not a requirement, to buy shares.Convertible Bond - Bond that the holder may exchange for a specified amount of equity. Convertibles are a combined security, consisting of a bond and an option, but not a requirement, to convert.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 13Patterns of Corporate FinancingFirms may raise funds from external sources or plow back profits rather than distribute them to shareholders.Should a firm elect external financing, they may choose between debt or equity sources.Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 14Sources of FundsCopyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved McGraw-Hill/Irwin13- 15Patterns of Corporate