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    BF Module 6 NDS

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    rhea.mjei
    Module 6 discusses corporate stocks, defining key terms such as stock, stock financing, and the differences between common and preferred stocks. It outlines the advantages and disadvantages of both common and preferred stock financing, including aspects like dividend claims and voting rights. The module also includes activity instructions for further engagement with the material.

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    BF Module 6 NDS

    Uploaded by

    rhea.mjei
    2 views3 pages
    Module 6 discusses corporate stocks, defining key terms such as stock, stock financing, and the differences between common and preferred stocks. It outlines the advantages and disadvantages of both common and preferred stock financing, including aspects like dividend claims and voting rights. The module also includes activity instructions for further engagement with the material.

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    Module 6 discusses corporate stocks, defining key terms such as stock, stock financing, and the differences between common and preferred stocks. It outlines the advantages and disadvantages of both common and preferred stock financing, including aspects like dividend claims and voting rights. The module also includes activity instructions for further engagement with the material.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2 views3 pages

    BF Module 6 NDS

    Uploaded by

    rhea.mjei
    Module 6 discusses corporate stocks, defining key terms such as stock, stock financing, and the differences between common and preferred stocks. It outlines the advantages and disadvantages of both common and preferred stock financing, including aspects like dividend claims and voting rights. The module also includes activity instructions for further engagement with the material.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Unit Long Term Financing

    Module Corporate Stocks Page|1


    SUBJECT BUSINESS FINANCE Units: 3.0

    MODULE 6: CORPORATE STOCKS


     STOCK – a security which represents a fraction of the ownership of a company.
     STOCK FINANCING – activity wherein shares of stocks are sold to raise funds for the long-
    term financing requirements of the firm.
     CAPITAL STOCK – the interest of the owners of a corporation.
     ISSUED STOCK – a portion of the authorized stocks which has been issued and sold.
     UNISSUED STOCK – portion of the authorized stocks which are not yet issued.
     DIVIDENDS – income from holding shares of stocks.
     RETAINED EARNINGS – portion of the profits not declared as dividends and use for capital
    financing requirements.

    CLASSES OF CORPORATE STOCKS


    1. COMMON STOCK – class of stock issued by all corporations and which represents the real
    equity capital; it has residual claim to earnings and assets and which carries the risk of
    business success or failure.
    VARIETIES OF COMMON STOCK:
    a. CLASSIFIED COMMON STOCK – stock that has been divided into classes, usually as
    Class A and Class B, in which Class A stocks are given preferences over Class B in terms
    of dividend payments and asset claims in case of liquidation.
    b. DEFERRED STOCK – a minor type of issues which entitles the holder to receive dividend
    payments at a specified date only.
    c. VOTING TRUST CERTIFICATES – a document used to give temporary voting control
    over a corporation to one or several individuals; issued to a shareholder and represents the
    normal rights of any other stockholder, such as receiving quarterly dividends in exchange
    for their common shares.
    d. GUARANTEED STOCKS – stocks of a corporation wherein the payment of dividends s
    guaranteed by another corporation; may arise when a corporation purchases or leases the
    property of another.

    ADVANTAGES OF COMMON STOCK FINANCING


    1. It does not entail fixed charges.
    2. There is no fixed maturity date attached to common stock financing.
    3. The firm’s credit standing is enhanced with the sale of common stock.
    4. There are times when common stocks are easier to sell than debt.

    MODULE 6: CORPORATE STOCKS PREPARED BY: NICOLE D. SANGUYU


    Unit Long Term Financing
    Module Corporate Stocks Page|2
    SUBJECT BUSINESS FINANCE Units: 3.0

    DISADVANTAGES OF COMMON STOCK FINANCING


    1. It gives the new shareholders the right to share control of the corporation.
    2. It has a dilutive effect on the corporation’s earnings per share and price per share.
    3. There is a risk that investors may perceive negatively the issuance of common stock resulting
    to a fall in the price of the stock.

    2. PREFERRED STOCK – class of stock which has a claim on assets before common stock, in
    the event that the firm is dissolved; it has a prior claim to dividends up to a specified amount or
    rate.

    PROVISIONS OF PREFERRED STOCK


    a. CLAIM TO DIVIDENDS – the preferred stock has a basic advantage of prior claim to
    dividends.
    In terms of dividends, preferred stocks can be classified into two:
    1. CUMULATIVE PREFERRED STOCK – accumulates dividends even if it is not paid for
    years.
    2. NON-CUMULATIVE PREFERRED STOCK – does not accumulate dividends if they are
    not declared for a given period.
    b. VOTING RIGHTS – preferred stockholders, in general, do not have the rights to vote.
    Instances when preferred stockholders may vote:
    1. If the corporation proposes to issue a debt security of a long-term nature.
    2. If the corporation misses a dividend or fails to pay a specified number of accumulated
    dividends, the preferred stockholders can participate in the annual election of the board of
    directors.
    c. SUBSCRIPTION RIGHTS – in case of additional issues of stock, some preferred stockholders
    have the right to subscribe, while others do not have the same right.
    TWO FORMS OF PREFERRED SOTKCS IN TERMS OF SUBSCRIPTION RIGHTS:
    1. WITH PRE-EMPTIVE RIGHTS – has the right to subscribe to additional issues of stocks.
    2. WITHOUT PRE-EMPTIVE RIGHTS – do not have the right to subscribe to additional issues
    of stocks.
    d. CALLABILITY – preferred stocks may also be classified as either callable or non-callable.
    1. CALLABLE PREFERRED STOCKS – those which may be bought back by the issuing
    corporation at its option.
    2. NON-CALLABLE PREFERRED STOCKS – those which cannot be bought back by the
    issuing corporation at its option.

    MODULE 6: CORPORATE STOCKS PREPARED BY: NICOLE D. SANGUYU


    Unit Long Term Financing
    Module Corporate Stocks Page|3
    SUBJECT BUSINESS FINANCE Units: 3.0

    ADVANTAGES OF PREFERRED STOCK ISSUE


    1. The claim of preferred stockholders on corporate earning is usually limited to a specific amount
    or rate per share.
    2. Preferred stockholders are owners and they have no claim that can force the corporation into
    bankruptcy proceedings for non-payments of dividends (creditors can start legal action to
    require payments).
    3. The issuance of preferred stocks will not jeopardize the existing controlling interest of the
    common stockholders.
    4. Preferred stocks increase the leverage of the common stockholders; since the rate of return
    paid to preferred stockholders is fixed, any return earned above that fixed return helps to
    increase the return to the common stockholders.

    DISADVANTAGES OF PREFERRED STOCK ISSUE


    1. Dividends are fixed payments and it increases the financial risk of the firm resulting to
    increases in the cost of all financing.
    2. Dividends are not deductible as a tax expense, unlike the interest paid on debt.

    ACTIVITY 6 – 2ND QUARTER

    INSTRUCTIONS: Answer the following items. Post your answer in your private Facebook group with
    caption ACTIVITY 6 – SECOND QUARTER – BF..

    1. Do you think a corporation can issue shares of stocks which is above the indicated shares in
    its charter? Why or why not?
    2. Compare common stock and preferred stock
    3. Explain why stocks receive “residual claim”.

    REFERENCE:
    Medina, R. Ph.D. (2007). “Business Finance”. Rex Book Store Inc. 856 Nicanor Reyes Sr. St., Sampaloc,
    Manila

    MODULE 6: CORPORATE STOCKS PREPARED BY: NICOLE D. SANGUYU

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