Class IX

Financial Management I

Module 2 Notes

William N. Goetzmann

Class IX


Module Wrap-up and introduction to Long-Term Financing


Long-Term Corporate Financing
  • Selling Ownership: Stocks & Warrants
  • Borrowing: Bonds & Preferred Shares

The life of a share of stock
  • Start out in private hands, unformed
  • Designed: voting rights, par value, number of shares.
  • Taken public by an initial public offering via investment banking syndicate
  • Traded on an exchange: NYSE, AMEX, OTC/NASDAQ
  • NYSE: a specialist makes a market in the shares, matching bidders and skers, i.e. buyers and sellers.
  • NASDAQ: Electronic listing to match buys and sells.
  • Shares held in an investment portfolio.
  • Pays semi-annual dividends, as declared by the directors.
  • Shares are "voted" in control context.
  • Shares are tendered when a bid for acquisition is made.
  • OR, company goes bankrupt, and ownership structure is re organized.


The life of a bond

Bond issue is designed with certain features:
  • How much to borrow
  • When and how to repay
  • Contraints on the corporation's other financing
  • Callability
  • Sinking-fund provisions
  • Debentures (unsecured)
  • Bonds (secured)
  • Bond is issued via syndicate
  • Bonds are traded by companies who make markets in the bonds
  • They don't trade frequently. Bonds held in an investment portfolio
  • Called, repurchased, defaulted upon, paid off over the life of the bond.


Preferred Shares
  • Non-voting shares
  • Preferred because senior claim (over equity) to cash
  • Held by corporations due to tax laws


Warrants
  • Right to purchase shares for a fixed price, over a fixed period of time.
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YALE School of Management