Stocks and Bond Financing

8/2/2019 Stocks and Bond Financing

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CHAPTER XIII

REPORTERS: JUAN, ANNA MARIE E.

LAPAT, MAITHA ANGELA



Stocks owned capital of the business. considered as a permanent investment.

Stockholders people who invest in stocks; and their ownership is evidenced by aSTOCK CERTIFICATE.



Stock Financing

refers to the procurement of corporate funds through the

sale of shares of stocks to prospective investors.

It is a method of financing by increasing the equity capital.



Authorized Capital Stock the total amount of stocks of all classes authorized in thecertificate of incorporation.

• Issued Stocks

• Un-issued Stocks

Capital Stock represents the actual amount of stocks of all classeswhich are issued and outstanding at any time.



CapitalAccountant View: The total ownership of the businesswhich is obtained by deducting the total liabilities from thetotal assets.

Business people View: All assets of the business

regardless of where it came from whether equity or borrowedmoney.Economist View: All productive assets used in the

business excluding non-productive assets.



CAPITALIZATION refers to the sum of the face or par value of all outstandingstocks and bonds issued by the corporation.

Computed by adding all bonded indebtedness issued by thecorporation to the capital stock.



Example No. 1

A corporation issued 200,000 shares of common stocksand 100,000 shares of preferred stocks both having a par value of P100.00 each share. The corporation sold 150,000 shares of common stocks and 100,000 shares of preferred stocks at par. Italso had a bond issue of 50,000 bonds having a face value of

P1000.00 per bond. The corporation borrowed from the bankP 100,000,000.00 to augment its funds. Its books show a surplus of P20,000.00. What are the company’s authorized capital stock,capital stock, capital, and capitalization?



Authorized Capital Stock:Common Stocks (200,000 x 100) P 200,000,000Preferred Stocks (100,000 x 100) 100,000,000Authorized Capital Stock P 300,000,000

Capital Stock:

Common Stocks (150,000 x 100) P 150,000,000Preferred Stocks (100,000 x 100) 100,000,000Capital Stock P 250,000,000



CAPITALIZATION:Capital Stock P 250,000,000Bonds (50,000 x 1,000) 50,000,000

P 300,000,000CAPITAL

Capital Stock P 250,000,000Borrowed Funds 100,000,000Total Capital P 350,000,000



Un-issued StocksA portion of the authorized capital stock which have not yet beensubscribed and remains in the corporation.

Issued Capital Stock Refers to the stock already issued and outstanding.

Outstanding Stocks Refers to all issued and subscribed stocks which may be fully paid orpartly paid which are held by stockholder other than the issuingcorporation.



Un-issued stocks

Common Stocks (200,000- 150,000= 50,000*100) P 50,000,000

Issued StocksCommon Stocks (150,000*100) P 150,000,000Preferred Stocks (100,000*100) 100,000,000

P 250,000,000

Outstanding Stocks P250,000,000



Refers to those stocks issued and fully paid but reacquiredby the issuing corporation.

Reacquisition may be through:

• Purchase

• Gift

• Donation



A resolution passed by the board of directors to demand payment forthe unpaid subscription.

REQUIREMENTS:1. A board resolution must be made specifying the percentage of

the unpaid balance due when and where and to whom payment should bmade.

2. The resolution must specify the date of delinquency which shallnot be less than 30 days or more than 60 days from the date of call.

3. A notice of a call for payment must be sent to the stockholders.



The highest bidder is awarded the sale.

HIGHEST BIDDER

the buyer who is willing to pay the unpaid subscriptionincluding interest accruing thereon and the cost of publication

and other incidental expenses incurred in sale.



1. Defect or irregularity in the call for unpaid subscription.2. Defect or irregularity in the notice of delinquency.3. Defect or irregularity in the sale.



Major Classifications of Stocks:

1. Common Stocks2. Preferred Stocks

Common Stocks Simplest form of ownership in corporation.

It has the fundamental rights of the stockholder without any privilege.

Preferred Stocks Stocks with privileges and preferences aside from the fundamental

rights.



Preferred as to Dividends Stocks entitled to receive dividend of the corporation firstbefore the other stockholders of the corporation are paid theirshare.

Preferred as to Assets Stocks which share in the distribution of the proceeds fromthe sale of corporate assets before the common stockholdersreceived their share.



1. First receiver of dividends before all other stockholders.2. On the point of view of the corporation, the advantage of issuing

preferred stocks compared to issuance of bonds is that dividend maynot be declared in the event that the BOD believe that the corporationneeds the income for expansion. In bonds, interest is a fixed

obligation.3. The issuance of this stock increases the firm’s financial leverage. 4. In case of mergers, it can be exchanged for common stocks of the

acquired company.



1.Compare to bonds, preferred stocks are costlier for thecorporation.

2. It is also costly for the corporation because dividends arepaid from the after tax earnings while interests paid to

long term debt are tax-deductible.



PARTICIPATING and NON- PARTICIPATING PREFERRED STOCKS

Participating Stocks Stocks which still participate with the common stock even after theyhave receive their preferential rate.

Non-participating Stocks Stocks entitled only to their preferential rate.



Kinds of Participating Preferred Stocks

1. Full Participation- refers to those preferred stocks that still participatewith the common stocks after the common stocks have received thesame preferential rates as those given to the preferred stocks.

Example:Say a corporation issues 20,00 shares of common stocks with a par

value of P100.00 per share and participating preferred stocks of 4,00shares with a par value of P200.00 per share. They declare dividendsworth P200,000. Preferential rate is .06 per share.



Dividends P 200,000Participating Preferred Stocks

(4,000 x 200= 800,000 x .06) P 48, 000Common Stocks

(20,000 x 100= 2,000,000 x .06) 120,000 (168,000)P 32,000

Share of Participating PS (800,000/2,800,000*32,000= 9,142.86+48,000) 57, 142.86Share of CS (2,000,000/2,800,000*32,000= 22,857.14+ 120,000) 142,857.14



CUMULATIVE and NON-CUMULATIVE STOCKS

Cumulative Stocks- entitled to dividends even whendividends are not declared.

Non-cumulative Stocks- stocks entitled to dividends onlywhen declared.



CALLABLE AND REDEEMABLE STOCKS

Callable Stocks- stocks that can be redeemed by the issuing companybefore their maturity date.

TWO KINDS:

1. Mandatory type of Callable Stocks- requires the corporation toredeem the stocks with a specific period.

2. Optional type of Callable Stocks- does not require the corporation toredeem the stock.

Sinking Fund- an amount set aside from the earnings of the

corporation specifically earmarked for the redemption of stocks.



CONVERTIBLE STOCKS stocks that can be exchanged to other securities of thecorporation either for another class of stocks or bonds at aspecified ratio.

Conversion Ratio- the rate at which a stock is exchanged withother stocks or bonds of the corporation.



ADVANTAGES OF CONVERTIBLE BONDS1. It increases the stability of the stocks.2. It is also a protection to the stockholder against dilution of

the shares of the stocks of the corporation.



PAR VALUE and NO PAR STOCKS

Par Value Stock- one that has an assigned value on its face.• Par Value- minimum amount that the corporation should accept for thepayment of the stocks.

No par value Stock- stocks without any designated price on its face.



PAR VALUE and NO PAR VALUE STOCKS

RESTRICTIONS IN THE ISSUANCE OF NO PAR VALUE STOCKS:

1. No par value stocks may be sold less than P5.002. No par value stocks may be issued which are preferred as to assets.3. Cannot be sold on installment basis.4. Banks, trust companies, insurance companies, and building and loan

associations may not issue no-par value stocks.5. Cannot be issued without prior approval of the public service

commission.



Guaranteed Stocks- stocks whose dividend payments areassured by the corporation other than the issuing corporation.

Deferred Stocks- stocks whose dividend are postponed for atime in the future and that is subject to the lapse of a period of time or the occurrence of a particular event which allow thecorporation to declare dividends.



Stock Purchase Warrants- an instrument given to stockholders givinghim an option to buy shares of stocks from the company within the specificperiod of time at a stipulated price.

FOUNDER’s SHARES- stocks given to the incorporator’s of the firm.

PROMOTER’s SHARES- stocks used for compensating promoters for theservices they rendered in promoting the corporation.



corporate profits or earnings set aside by BOD to be distributed tostockholders in proportion to their stock holdings.

KINDS:1. Cash Dividends2. Stock Dividends3. Property Dividends4. Scrip Dividends5. Liquidating Dividends



CASH DIVIDENDS- distributed by the corporation when it has enoughcash to declare as dividends.

REQUIREMENTS:1. There must be an income.2. There must be enough cash to be given out as dividends.3. The dividends are declared by the Board of Directors4. Notice are sent to the stockholders.



STOCK DIVIDENDS- arise when the BOD decides to expand businessoperation.

REQUIREMENTS:1. There must be a corporate profit.2. The profit must be declared by the Board of Directors in stocks.3. The stock dividend must be approved by 2/3 of the outstanding stock

in meeting called for the purpose.4. A notice must be sent to the stockholders.



PROPERTY DIVIDEND- dividend given at the discretion of the board of

directors in the form of properties of the corporation.

SCRIP DIVIDEND- a written certificate issued by the corporation to itsstockholders entitling them to the payment of cash at some futuredesignated date.

LIQUIDATING DIVIDEND- dividends arising from the winding up of acorporation.

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Stocks and Bond Financing

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