Managerial finance

Presented to:SIR KHALID ANJUM

presented by:MARYAM JAVED

ATIA ARIF

NAZIMA KOUSAR

MUSSRAT SHAHEEN

Differences b/w debt and equity capital:

Debt capital: All long term borrowing incurred by a firm,

including bonds.

Equity capital: The long term funds provided by the firm’s

owners, the stockholders.

Debt financing is obtained from creditors and equity

financing is obtained from investors.

who then become part owners of the firm.

maturity:

Equity capital is a permanent form of financing it does

not mature.

Debt has maturity date and company has to pay to

the lenders.

Tax treatment:

Interest payments to debt holders are treated as tax-

deductible expenses by the issuing firm.

Dividend payments to a firm’s stockholders are not tax-

deductible.

The tax deductibility of interest lowers the corporation’s

cost of debt financing, further causing it to be lower than

the cost of equity financing.

Common and preferred stock:

common stock:

Common stockholders, who are sometimes referred to as residual

owners, are the true owners of the firm.

As residual owners, common stockholders receive what is left, the residual, after all other claims on the firm’s income and assets have

been satisfied.

They are assured of only one thing: that they cannot lose any more

than they have invested in the firm.

Ownership:

The common stock of a firm can be privately owned by an private investor, closely owned by an individual investor or small group of investors, or public owned by a board group of investors.

The shares of privately owned firms, which are typically small corporation, are generally not traded; if the shares are traded; the transaction are among private investors and often require the firm’s consent.

Large corporations are publicly owned, and their shares are generally actively traded in the broker or dealer markets.

Par value:

The par value of common stock is an arbitrary value

established for legal purpose in the firm corporate

charter, and can be used to find the total number of

shares outstanding by dividing it into the book value of

common stock.

Preemptive rights:

Preemptive Rights: Allows common stockholders to

maintain their proportionate ownership in the

corporation when new shares are issued.

Dilution of ownership : Occurs when a new stock issue

results in each present shareholder having a claim on a

smaller part of the firm’s earning than previously.

Preemptive rights(cont.): financial instruments that allow stockholders to purchase additional shares at a price

below the market price, in direct proportion to their

number of owned shares.

Authorized, outstanding, and issued

shares:

Authorized shares: The number of shares of common

stock that a firm’s corporate charter allows it to issue.

Outstanding shares: The number of shares of common

stock held by the public.

Treasury stock: The number of shares of outstanding

stock that have been repurchased by the firm.

Issued shares: Issued shares are shares of common stock

that have been put into circulation.

Issued shares = outstanding shares + treasury

stock.

Voting rights:

Generally, each share of common stock entitles its

holder to one vote in the election of directors and on

special issues.

Votes are generally assignable and may be cast at the

annual shareholders meeting.

Proxy statement: A statement transferring the votes of a stockholder to another party.

Voting rights(cont.):

Supervoting shares: stock that carries with it multiple

votes per share rather than the single vote per share

typically given on regular shares of common stock.

Nonvoting common stock: Common stock that carries

no voting rights; issued when the firm wishes to raise

capital through the sale of common stock but does not

want to give up its voting control.

Proxy battle: the attempt by a non-management group to gain control of the management of a firm by soliciting

a sufficient number of proxy votes.

Dividends:

The payment of dividend to the firm’s shareholder is at

the discretion of the company’s board of director’s.

Dividends may be paid in cash, stock, or in merchandise.

Preferred stock:

Preferred stock gives its holders certain privileges that make them

senior to common stockholders.

Preferred stockholder are promised a fixed periodic dividend, which is stated either as a percentage or as a dollar amount.

Par-value preferred stock: Preferred stock with a stated face value

that is used with the specified dividend percentage to determine

the annual dollar dividend.

No-par preferred stock: Preferred stock with no stated face value

but with a stated annual dollar dividend.

Zero-growth model:

An approach to dividend valuation that assume a constant, non-

growing dividend stream.

Constant growth model:

A widely cited dividend valuation approach that assume that

dividend will grow at constant rate, but a rate is less than the

required return.

Variable growth model:

A dividend valuation approach that allows for a change in the

dividend growth rate

Type equation here.