The alternative financing methods that a listed company can use to raise extra cash to finance a new long-term investment project are stock and long-term debt. Section 2 and Section 3 discuss the alternative financing methods in detail. The last section evaluates the potential impacts on the company's market value once the announcement of financing method is made.
There is usually a stated value on each stock certificate called the par value. However, some stocks have no-par value. The total par value is the number of shares issued multiplied by the par value of each share and is sometimes referred to as the dedicated capital of a corporation. Shares of common stock are the fundamental ownership units of the corporation. The articles of incorporation of a new corporation must state the number of shares of common stock the corporation is authorised to issue. The board of directors of the corporation, after a vote of the shareholders, can amend the articles of incorporation to increase the number of shares authorised; there is no limit to the number of shares that can be authorised. There is no requirement that all of the authorised shares actually be issued. Although there are no legal limits to authorising shares of stock, some practical considerations may exist. Authorising a large number of shares may create concern on the part of the investors, because authorised shares can be issued later with the approval of the board of directors but without a vote of the shareholders. Capital surplus usually refers to amounts of directly contributed equity capital in excess of the par value. The sum of the par value, capital surplus, and accumulated retained earnings is the common equity of the firm, which is usually referred to as the firm's book value. The book value represents the amount contributed directly and indirectly to the corporation by equity investors. The conceptual structure of the corporation assumes that shareholders elect directors who in turn elect corporate officers-more generally, the management-to carry out their directives. It is the right to elect the directors of the corporation by vote that constitutes the most important control device of shareholders. Directors are elected each year at an annual meeting by a vote of the holders of a majority of share who are present and entitled to vote. A proxy is the legal grant of authority by a shareholder to someone else to vote his or her shares. For convenience, the actual voting in large public corporations usually is done by proxy. Many companies have hundreds of thousands of shareholders. Shareholders can come to the annual meeting and vote in person, or they can transfer their right to vote to another party by proxy. The value of a share of common stock in a corporation is directly related to the general rights of shareholders. In addition to the right to vote for directors, shareholders usually have the following rights: (1) the right to share proportionally in dividends paid (2) the right to share proportionally in assets remaining after liabilities have been paid in a liquidation (3) the right to vote on matters of great importance to stockholders, such as a merger, usually decided at the annual meeting or a special meeting (4) the right to share proportionally in any new stock sold (Ross, Westerfield, and Jaffe, 1996, p. 365-369).
A distinctive feature of corporations is that they issue share of stock and are authorised by law to pay dividends to the holders of those shares. Dividends paid to shareholders represent a return on the capital directly or indirectly contributed to the corporation by the shareholders. The payment of dividends is at the discretion of the board of directors. Here are ...
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