Financing of the corporation Plowback: Reinvesting of earnings Equity securities 1. Common shares vote for directors vote for certain corporate decisions (mergers, executive compensation) right to dividends rights on liquidation (last in line) 2. Preferred shares They have elements of stock and debt, they have dividend preferences at a fixed rate over common shares. If they are cumulative preferred shares, the entire accumulation must be paid before any dividends are paid to common shareholders. Normally the holders do not vote for directors. They are preferred over common stock in liquidation. Debt securities: bonds and debentures The corporation pays interest periodically and pays the principal on maturity. Bonds are secured, debentures are unsecured. Debt holders have no ownership interests. In liquidation: always debt before equity. Transfer of shares Restrictions on transferability of shares Right of first refusal (= preemption rights): gives other shareholders the right to match the offer that a selling shareholder receives for his shares. Option contract: put or call option. Consent restraint: any transfer requires the consent of the board of directors.
Chapter 44 Legal Aspects of Corporate Finance
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