Is there any difference in value between cumulative and non-cumulative preferred stock? Why, or why not?
While the difference is minimal in financially healthy companies, there is a significant difference in companies in financial distress. A company with outstanding cumulative preferred stock cannot pay dividends on its common stock unless all past dividends on the preferred issue have been fully paid. Financially healthy companies routinely pay all preferred dividends; to the preferred shareholders of these firms, the cumulative feature adds little value to the issue because it is highly unlikely that it will ever be invoked. However, companies in financial distress often are cash poor and elect to suspend preferred dividends in order to conserve their cash. To the preferred shareholders of these firms, the cumulative feature is critical to maintaining any value to the preferred shares at all.
Companies issue warrants for at least three reasons:
(1) as the mechanism for conveying preemptive rights to their shareholders (“stock subscription warrants”),
(2) as incentive compensation for employees (“employee stock options”), and
(3) as extra compensation for lenders and preferred stockholders (“sweeteners,” “kickers”).
Companies issue convertible bonds for at least four reasons:
(1) to minimize the interest rate on their debt since the conversion feature forms part of the lenders’ value,
(2) to raise funds in a poor stock market that will eventually become equity at a much better share price,
(3) to create financial leverage for a period of time which then disappears upon the bonds’ conversion, and
(4) to use and then automatically free up debt capacity.
What is the relationship of a warrant and a convertible bond to a call option?
Both a warrant and a convertible bond contain a call option. A warrant is a call option. The holder of the warrant can force the company to deliver a specified number of shares of its stock to be paid for with cash. Warrants differ from other call options only in that they are issued by the company whose stock can be called. A convertible bond is the combination of a bond and a call option. The bond’s owner can force the company to deliver a specified number of shares of its stock to be paid for with the bond. And, like a warrant, the option is granted by the company whose stock can be called.
Under what circumstances can a company successfully force conversion of a convertible bond? Under what circumstances will the company fail?
Since holders of convertible bonds generally have no reason ever to convert the bonds to stock, companies often use a call feature to force conversion. Bondholders will convert their bonds in response to a call if the value of the stock to be received upon conversion exceeds the proceeds from the call. This will be the case if the stock has risen sufficiently since the bond was issued. On the other hand, if the company’s stock price has not increased very much so that the value to be received upon conversion is less than the proceeds from the call, bondholders will simply submit to the call and the company will find itself paying out cash instead of issuing new stock.
potential violation of duty (responsibilities of government officials to uphold the law)
∙∙ Weaknesses: ignores promises and duties, does not take into consideration rights,
justice, and obligations (i.e., free speech might do more harm, yet is a basic right)
obligations), examines motives (e.g., giving to charity for tax reasons or for
cut priority among rules
individuals affected by an action (> 0 = good, < 0 = evil) – critics argue is pleasure a
sufficient measure of human happiness?
PRODUCES THE GREATEST BALANCE OF PLEASURE OVER PAIN FOR
(greatest net balance between pleasure and pain), universalism (everybody included in the
GREATEST BALANCE OF PLEASURE OVER PAIN FOR EVERYBODY
SET OF RULES THE GENERAL ACCEPTANCE OF WHICH WOULD PRODUCE
THE GREATEST BALANCE OF PLEASURE OVER PAIN FOR EVERYONE
— Difficulty in calculating how much, in identifying alternative courses, and
accounting for differing preferences among different people
wrong under the utilitarian calculation
(predetermined ends with least costly means)
understates value (ignores opportunity costs)
Are profits, which are ploughed back into the business to create growth? This form of finance is suitable for organic growth as the pace of the expansion can be matched to the funds available. Are used to finance the purchase of new buildings or equipment. They have no direct cost for a company but take along time to build up.
Referred to as the equity of the company. This is money imputed into the firm by the individual shareholders. As the firm makes money, the shareholders receive a % dividend on their investment. However if the firm’s profits are low, the individual dividend will be low.
Is the long-term finance provided by financial institutions? Long-term loans are called debentures. When applying for a loan to finance expansion, a company has to supply the bank with accounts showing the present state of the business. Also needed are cash flow forecasts, costings, and research.
Information needed before any loan is granted includes:
Creditworthiness of borrower
Purpose of loan
Capacity to repay
Amount of loan
Duration of loan