9.2 Read and translate the text Long term financing (common stock, preferred stock)

1. If the company’s managers want to avoid increasing the company’s debt obligations, they turn to equity funding. In short, equity financing is the sale of ownership in a firm. The two basic instruments of equity financing are common stock and preferred stock.

2. Most people who own stock in a corporation hold common stock. Common stockholders own shares in the company and elect a Board of Directors. Each stockholder receives a stock certificate that indicates the number of shares purchased. Each share entitles the stockholder to one vote. The average stockholder holds only a few shares, perhaps 100 to 200. Common stockholders have a right to sell their stock whenever they want, to buy newly issued stock before it is made available to the general public, to inspect the company records, to elect the Board of Directors and so on. Besides cash dividends, holders have one more source of re­turn on their investment - the increase in the market value of each share.

3. Common stockholders receive their share in the company’s earn­ing in the form of a dividend. Dividends are paid either quarterly or annually. Minimum dividends are 25 percent per year. Common stock may be issued on a par or no par basis. Par value is the dollar amount printed on the face of each stock certifi­cate. As this figure has little real value, most corporations either issue no par stock (stock with no given value) or give their stock an arbitrary value.

4. Common stock is riskier than debt investments. The corporation may not make a profit or be able to pay dividends. A holder always runs the risk of losing his entire investment should the company go bankrupt. There is also a market risk caused by fluctuation of the stock. Stocks that fluctuate widely in market value are the riskiest but also may have the highest return. If the corporation goes bankrupt, the common stockholders have a claim on its assets. But in reality, if the corporation dissolves the common stockholders seldom receive much because the claims of creditors, lenders, bondholders and preferred stockholders take priority over those of the common stockholders.

5. In addition to common stock some corporations issue pre­ferred stock. It gives its holders preference over common stock­holders in the payment of dividends and distribution of assets if the company goes bankrupt. This type of stock is issued to attract buyers who want a regular but sure income and are willing to accept a lower rate of return to get it. Preferred stock is safer than common stock since it has a fixed dividend rate, and its market value doesn’t change rapidly. But its holders don’t share in the operations of the company. Preferred stock can be converted into common stock, which allows holders to vote for the Board of Directors.

9.3 Answer the questions to the text:

1. What do the company’s managers turn to when they want to avoid increasing the debts of the company?

2. What is equity?

3. What are the two main instruments of equity financing?

4. What does each stockholder receive?

5. What does the stock certificate indicate?

6. How many votes does one share entitle the stockholder to?

7. How many shares does an average stockholder have?

8. What are the stockholder’s rights?

9. How do the stockholders receive their share in the company’s earnings?

10. What do the stockholders do if the company goes bankrupt?

11. Why do the common stockholders receive little when the company goes bankrupt?

12. On what basis do companies usually issue common stock?

13. What is par value?

14. Why do companies prefer to issue no par stock?

15. What other sources of return on their investments do the stock holders have?

16. Do companies always pay dividends?

17. What happens to the investments if the company goes bankrupt?

18. What is fluctuation of the stock?

19. What privileges over common stockholders do preferred stockholders have?

20. Why do companies issue preferred stock?

21. What is the difference between common stock and preferred stock?

22. What rights do preferred stockholders obtain if they convert their stock into common stock?