FINS1613 Lecture Notes - Lecture 3: Preferred Stock, Capital Structure, Government Debt

28 views3 pages

aquamarinegoat534

2 Sep 2018

School

Department

Course

Professor

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

The fi(cid:396)(cid:373)"s sou(cid:396)(cid:272)e of fi(cid:374)a(cid:374)(cid:272)i(cid:374)g is (cid:272)alled its (cid:272)apital. The (cid:272)apital st(cid:396)u(cid:272)tu(cid:396)e is the o(cid:449)(cid:374)e(cid:396)ship structure of the firm and refers to the way a firm finances its overall operations and growth by using different sources of funds, i. e. the relative proportion of debt, equity and securities. Securities are financial instruments that give investors rights to cash flows for a firm. They are paid in preference from bonds then preference shares then ordinary shares. A bond collateralised by a manufacturing plant receives preference for cash received when the plant is sold: absolute priority and collateral decrease the risk of owning debt. O(cid:396)di(cid:374)a(cid:396)y sha(cid:396)e e(cid:395)uity is the (cid:396)esidual (cid:272)lai(cid:373) i(cid:374) a fi(cid:396)(cid:373)"s (cid:272)apital st(cid:396)u(cid:272)tu(cid:396)e, (cid:396)e(cid:272)ei(cid:448)i(cid:374)g (cid:272)ash flo(cid:449)s only after payments are made to all other securities. If a firm does poorly, payments to the residual claimant are stopped. However, when a firm does well, the residual claimant receives all the excess cash flows.

Related Questions

Many businesses find it generally more efficient to enlist the services of a financial institution when it comes time to raise capital: IE. Investment Banks: An organization that underwrites and distributes new investment securities and helps business obtain financing. Commercial Banks: The traditional department store type of financing serving a variety of savers and borrowers. Financial Service Corporations: A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. Credit Unions: Cooperative association whose members have a common bond such as employees of the same firm. Pension Funds: Retirement plans funded by corporations or government agencies. Life Insurance Companies: Take annual premium payments and invest these funds in stocks, bonds, or real estate and make payments to beneficiaries of the insured parties. Mutual Funds: Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt issued by business or government. They typically pool funds to reduce risk by diversification. Exchange Traded Funds (ETFs): Buy a portfolio of stocks of a certain type of business sector. IE. media companies, oil companies, Chinese companies, etc. and then sell their own shares to the public. Hedge Funds: Not regulated by the Securities and Exchange Commission (SEC). Typically have large minimum investments of over $1 million and marketed to individuals an institutions with high net worth. Private Equity Companies: Target, buy, and then manage entire firms. Most of the money used to buy these companies is borrowed. Why are the various financial instruments considered claims against a company's future cash flows ?

Which of the following statements is FALSE?

Debt holders are not foolishâthey recognize that when the firm defaults, they will not be able to get the full value of the assets. As a result, they will pay less for the debt initially.

The costs of financial distress represent an important departure from Modigliani and Miller's assumption of perfect capital markets.

Levered firms risk incurring financial distress costs that reduce the cash flows available to investors.

When securities are fairly priced, the original shareholders of a firm pay the future value of the costs associated with bankruptcy and financial distress.

15. Which statement is false?

A convertible bond gives the bondholder the right to exchange their bonds for a preset number of shares of stock.
A warrant is a security that is often sold with bonds but that can be detached (bought and sold separately) from the bond
Most preferred stock is owned by individual investors due to the fixed dividends.
Arrearages are unpaid preferred dividends

16. As a company increases its level of debt while holding assets constant, then ______________.

The firm

byzantiumdinosaur161

FINS1613 Lecture Notes - Lecture 3: Preferred Stock, Capital Structure, Government Debt

Document Summary

Get access

Related Documents

FINS1613 Lecture Notes - Lecture 3: Common Stock, Dividend, Capital Structure

FINS1613 Lecture Notes - Lecture 2: Seasoned Equity Offering, Bond Valuation, Zero-Coupon Bond

FINS1613 Lecture 3: FINS Week 3 Lect

Related Questions