Public Sales of Stock

Equity Financing

Corporate Bonds.

Like commercial paper, a corporate bond is a contract - a promise by the issuing company or organization to pay the holder a certain amount of money on a specified date. Unlike commercial paper, however, bond issuers do not pay off quickly. In many cases, bonds may not be redeemed for 30 years from the time of issue. In addition, unlike commercial paper, most bonds pay the bondholder a stipulated sum of interest semiannually or annually. If the company fails to make a bond payment, it is said to be in default.

The terms of a bond, including the amount to be paid, the interest rate, and the maturity date (when the principal is to be paid off), differ from company to company and from issue to issue. They are spelled out in the bond contract, or bond indenture. The indenture also identifies which of the firm's assets, if any, are pledged as collateral for the bonds.

In addition to planning the types of bonds to sell, financial managers must plan for the retirement of these bonds - that is, how the borrowed funds will be repaid.

Corporate bonds are the major source of long-term debt financing for most corporations. These bonds are attractive when companies need large amounts of funds for long periods of time. The issuing company gets access to large numbers of lenders through nationwide bond markets and stock exchanges.

But bonds involve expensive administrative and selling costs. They also may require very high interest payments if the issuing company has a poor credit rating.

Although debt financing has strong appeal in some cases, turning inside the company for long-term funding preferable under other circumstances. In small companies, the founders may increase their personal investment in the firm. In most cases, however, equity financing takes the form of issuing common stock or of retaining the firm's earnings. As you will see, both options involve putting the owners' capital to work.

The sale of stock, both preferred and common, to the general investor public represents a major source of equity funds for corporations. Such sales provide cash inflows for the firm and a share in ownership for the stock purchasers. Stocks are shares of ownership in the corporation, and stockholders are considered the real owners of the firm. However, they are not guaranteed dividend payments. Stockholders receive dividends only after a firm's bondholders are paid; and even then, dividend payments must be decided by the firms' board of directors. Since the stock of many corporations is traded on organized security exchanges, stockholders can easily sell their shares.

Дата добавления: 2015-01-03