Financial Management I
Module 2 NotesWilliam N. Goetzmann
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
- 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.
- Non-voting shares
- Preferred because senior claim (over equity) to cash
- Held by corporations due to tax laws
- Right to purchase shares for a fixed price, over a fixed period of time.
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YALE School of Management