Corporations (Finance)

Question 1

Corporations (Finance)

Capital Structure

Answer 1

A corporation’s capital structure refers to the particular mix of debt and equity that the business uses to finance its operations and plans for future growth.

Question 2

Corporations (Finance)

Initial Capital:
Sources

Answer 2

1. Contributions from Founders
2. Issuing Stock/Securities Offerings
3. Borrowing Money
   a. From Banks
   b. From the Public at Large (Capital Markets)

Question 3

Corporations (Finance)

Authorized Stock

Answer 3

The maximum number of shares the company may issue, per the articles of incorporation

Question 4

Corporations (Finance)

Issued Stock

Answer 4

1. Shares that have been transferred to shareholders in exchange for consideration
   AND
2. All treasury stock

Question 5

Corporations (Finance)

Outstanding Stock

Answer 5

Shares that have been issued to shareholders, not including treasury stock

Only Outstanding Shares are eligible to vote at shareholder meetings

Dividends are issued to holders of outstanding stock

Question 6

Corporations (Finance)

Shareholders

Answer 6

Investors who make an equity investment in a corporate that is represented by shares of stock

Shareholders hold authorized, issued, and outstanding shares

Question 7

Corporations (Finance)

Treasury Stock

Answer 7

Stock held by the corporation

Treasury stock is authorized and issued, but it is not outstanding

Corporations may reacquire/repurchase authorized, issued, and outstanding stocks, restoring them to the status of authorized, but not issued or outstanding.

Question 8

Corporations (Finance)

Par Value Stock:
Effect of “No Par Value” Stated

Answer 8

If no par value is stated, the board can allocate to stated capital and capital surplus at its discretion

Question 9

Corporations (Finance)

Par Value Stock:
Stated Capital Account

Answer 9

The par value amount goes to the stated capital account

Question 10

Corporations (Finance)

Par Value Stock:
Capital Surplus Account

Answer 10

Any amount over the par value amount goes to the capital surplus account

Question 11

Corporations (Finance)

Par Value Stock:
Watered Down/Discount/Bonus Stock

Answer 11

Stock that is issued below par value

Question 12

Corporations (Finance)

Common Stock:
Stockholder Rights

Answer 12

The default class of stock

1. Voting Rights
2. Distribution Rights
3. Liquidation Rights
4. Preemptive Rights (maybe)

Question 13

Corporations (Finance)

Common Stock:
Stockholder Voting Rights

Answer 13

Common stock has full, unlimited voting rights for directors and for approving certain fundamental changes to the business

Typically one-stock-one-vote, but sometimes fractional

If there are different classes of stock, certain voting rights may be altered
Directors may be voted for using straight or cumulative voting

Question 14

Corporations (Finance)

Voting for Directors:
Straight Voting

Answer 14

Each stockholder is entitled to vote based on on-stock-one vote per each director position

May require a majority or plurality to win

Question 15

Corporations (Finance)

Voting for Directors:
Cumulative Voting

Answer 15

Each stockholder is entitled to vote based on the number of stocks held multiplied by the number of open director position

They may apply their votes to one or more open director positions

Only requires a plurality to win

Question 16

Corporations (Finance)

Common Stock:
Shareholder Distribution Rights

Answer 16

Common stockholders receive distributions based on their overall percentage of shares

Question 17

Corporations (Finance)

Common Stock:
Stockholder Liquidation Rights

Answer 17

Common stockholders are entitled to residual assets on liquidation only if and after the corporation has satisfied all other debts and obligations

Common stockholders are paid only if and after preferred stockholders liquidation rights have been satisfied

Question 18

Corporations (Finance)

Preferred Stock
Rights

Answer 18

Preferred stock has preference over common stock, meaning preferred stockholders are paid first upon distribution and/or liquidation

1. Voting Rights
2. Distribution Rights
a. Dividend Preferences
.
.
b. Cumulative v. Noncumulative Stock
.
Cumulative Stock is accumulated year over year when the corporation has not issued distributions
.
Noncumulative Stock does not accumulate, the preferred stockholder only recieves their preference when distributions are made
.
c. Participating v. Nonparticipating Stock
.
Participating Stock receives both the common stock distribution and the preferred stock distribution
.
Nonparticipating Stock only receives the preferred stock distribution
.
.
3. Liquidation Preference
4. Redemption Preference
5. Conversion Rights

Question 19

Corporations (Finance)

Preferred Stock:
Voting Rights

Answer 19

Dictated by the specific terms of the class of stock

Preferred stockholders may have special, limited, or no voting rights

Question 20

Corporations (Finance)

Preferred Stock:
Distribution Rights
Dividend Preference

Answer 20

Preferred stockholders are generally entitled to receive distributions before common stockholders

Question 21

Corporations (Finance)

Preferred Stock:
Types of Redemption Preferences

Answer 21

1. Call/Callable Shares
2. Put/Right of Redemption

Question 22

Corporations (Finance)

Preferred Stock:
Redemption Preferences
Call/Callable Shares

Answer 22

Stock is callable if the corporation has the authority to reacquire/callback all or a portion of the shares from the shareholders, at the board’s discretion

The amount to be paid is governed by the articles of incorporation

Question 23

Corporations (Finance)

Preferred Stock:
Redemption Preferences
Sinking Fund

Answer 23

To ensure sufficient funds to repurchase the redeemable preferred stock, the corporation usually establishes a separate account, called the sinking fund

The corporation deposits funds into the sinking fund overtime for redemption purposes.

The fund cannot be used for other purposes

Question 24

Corporations (Finance)

Preferred Stock:
Redemption Preferences
Put/Right of Redemption

Answer 24

A stockholder may have the right to compel the corporation to redeem/buy back their shares

Requirements
1. There must be sufficient funds in the sinking fund
2. It must be in accordance with the articles of incorporation

Question 25

# Corporations (Finance) **Preferred Stock:** Conversion Rights

Answer 25

Preferred stockholders **may** have the **right to convert** their *preferred* stock into **cash, indebtedness,** or **another class/series of shares** at an agreed-on price ratio If the right exists, the **corporation** *must* have an adequate number of **authorized, unissued shares** to allow preferred shareholders to exercise this right Commonly coupled with **anti-dilution provisions**

Question 26

# Corporations (Finance) **Debt Financing:** Benefits | Corporation, Shareholder, & Creditor Benefits

Answer 26

**Corporation & Shareholder Benefits** 1. Retain Ownership 2. Retain Enhanced Value **Creditor Benefits** 1. Reliance 2. Preference over equity holders 3. If **secured,** ability to recover via specific collateral property

Question 27

# Corporations (Finance) **Debt Financing:** Detriments | Corporation, Stockholder, & Creditor Detriments

Answer 27

**Corporation & Shareholder Detriments** 1. Burden of Regular Payments regardless of profits a. Risk of Default b. Risk of Acceleration c. Ability/Inability to Cure 2. Unfavorable Terms 3. Possible Involuntary Bankruptcy Petitions by Creditors 4. Reduced Company Appeal to potential investors **Creditor Detriments** 1. No Possibility of Enhanced Value Gains 2. Risk of Debtor Bankruptcy, even if the debt is secured

Question 28

# Corporations (Finance) **Primary Types of Debt Financing**

Answer 28

1. Loans/Promissory Notes 2. Bonds 3. "Zero-Coupon" Bonds 4. "Junk" Bonds 5. Debenture 6. Line of Credit 7. Accounts Payable

Question 29

# Corporations (Finance) **Debt Financing:** "Zero Coupon" Bond

Answer 29

A **bond** with **zero interest payments** due *until* the end of the term

Question 30

# Corporations (Finance) **Debt Financing:** "Junk" Bond

Answer 30

A **bond** with a **below investment grade credit rating**

Question 31

# Corporations (Finance) **Debt Financing:** Line of Credit

Answer 31

a **preauthorized loan** that the corporation can draw from on a variable basis and **only pay interest** when money is taken out

Question 32

# Corporations (Finance) **Secured Transactions**

Answer 32

A **loan** or **credit transaction** in which the lender acquires a **security interest** in collateral owned by the borrower Secured transactions are **secured** at the moment of **attachment** and may be **perfected**

Question 33

# Corporations (Finance) **Secured Transactions:** Attachment

Answer 33

Attachment occurs when: 1. **Value** has been given, 2. The **debtor** has rights in the collateral, and 3. The **creditor** *either*: a. **takes possession** of the collateral, or b. obtains a **security agreement**

Question 34

# Corporations (Finance) **Secured Transactions:** Perfection

Answer 34

Prefecting provides **public notice** to third parties that specific property is **encumbered** **Timing** is **critical**, because it **establishes priority**

Question 35

# Corporations (Finance) **Favorable Debt Enhancements**

Answer 35

1. Redemption Terms/Prepayment Penalties 2. Convertability 3. Priority 4. Voting Rights

Question 36

# Corporations (Finance) **Favorable Debt Enhancements:** Redemption Terms/Prepayment Penalties

Answer 36

**Redemption Terms** ***forbid*** the creditor from calling the debt security *before* **maturity date** **Prepayment Terms** impose a **penalty** for the borrower paying off the debt *before* **maturity**