Chapter 17: Common And Preferred Stock Financing Due May 12

Chapter 17 Common And Preferred Stock Financingdue May 12 2015assig

Chapter 17. Common and Preferred Stock Financing due May 12, 2015 assignment.

Analyze the concepts related to common and preferred stock financing as discussed in Chapter 17. Discuss the characteristics, differences, advantages, and disadvantages of issuing common stock versus preferred stock. Include explanations of why companies may choose to issue one type over the other, considering factors such as control, dividend payments, and financing needs. Support your discussion with relevant examples and references to scholarly sources.

Paper For Above instruction

The capital structure of a corporation significantly influences its financial stability, growth, and market perception. Among the various instruments used to raise funds, common and preferred stocks are fundamental to equity financing. Understanding their distinct features, advantages, and disadvantages is essential for corporate decision-making and for investors seeking to evaluate their investment options effectively.

Characteristics of Common Stock

Common stock represents ownership in a corporation and grants shareholders voting rights, typically one vote per share, enabling them to participate in corporate governance through electing the board of directors and other matters submitted to shareholder approval (Brealey, Myers, & Allen, 2020). These shares also entitle holders to dividends, which are variable and depend on the company's profitability and dividend policy. The amount of dividends paid to common shareholders is not fixed, and in cases of financial distress, they are paid after preferred shareholders and debt obligations are fulfilled.

Common stockholders face higher risk than debt holders or preferred stockholders because, in the event of bankruptcy, they have a residual claim on assets only after all debts and preferred dividends are paid (Stowe, 2018). Nevertheless, they benefit from capital appreciation and voting rights, which can be influential in corporate decisions, making common stock an attractive investment for those seeking growth and control.

Characteristics of Preferred Stock

Preferred stock is a hybrid security combining features of both bonds and common stocks. Preferred shareholders generally do not have voting rights, but they have priority over common shareholders regarding dividends and asset distribution in liquidation (Ross, Westerfield, & Jordan, 2020). Dividends on preferred stock are often fixed and paid regularly, providing a more predictable income stream, appealing to investors seeking stability.

Preferred stockholders' dividends are typically cumulative, meaning missed dividends accrue and must be paid before common shareholders receive dividends (Gitman & Zutter, 2018). Additionally, preferred shares may be redeemable or convertible into common shares, offering optionality to investors and the issuing company.

Advantages and Disadvantages

Issuing common stock allows companies to raise capital without increasing debt obligations, avoiding interest expenses, and diluting ownership control minimally if the company chooses not to issue too many shares (Brealey et al., 2020). However, it dilutes existing ownership and may result in loss of control if new shares are significant, especially in the case of public offerings. The variability of dividends aligns with the company's profitability, which can be advantageous during downturns but problematic when profits are high, as dividends are not guaranteed.

Preferred stock offers a more stable revenue stream through fixed dividends and does not dilute voting control, making it attractive for investors and companies valuing stability. Conversely, preferred shares often come with higher issuance costs and favorable dividend preferences that can burden the company's earnings (Ross et al., 2020). Additionally, preferred stock typically lacks voting rights, limiting shareholder influence over corporate decisions.

Factors Influencing the Choice Between Common and Preferred Stock

Companies choose between issuing common or preferred stock based on their financing needs, control considerations, and market conditions. Sectors with high growth potential may prefer common equity to maximize capital gains and sharing ownership, while mature firms seeking steady income may issue preferred shares.

Control is a pivotal factor; issuing preferred stock might allow existing owners to raise funds without losing voting power, whereas issuing common stock might dilute control but enables raising larger amounts of capital quickly. The cost of capital is another consideration, as preferred stocks often come with fixed dividend costs, which could be advantageous or disadvantageous depending on the company's profitability and interest rate environment (Brealey et al., 2020).

Conclusion

Both common and preferred stocks serve vital roles in corporate finance, offering distinct advantages and drawbacks. The issuance of common stock provides ownership dilution but contributes to growth and market perception of the company's prospects, whereas preferred stock offers income stability and prioritization but at a potentially higher cost and with limited voting influence. Strategic considerations, market conditions, and corporate goals remain central in choosing between these equity instruments.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.

Gitman, L. J., & Zutter, C. J. (2018). Principles of Managerial Finance (15th ed.). Pearson.

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2020). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.

Stowe, R. (2018). Corporate Financial Management: Theory and Practice. Routledge.

Damodaran, A. (2019). Applied Corporate Finance (4th ed.). John Wiley & Sons.

Frazer, J. R., & Young, R. (2017). Corporate Finance: Theory and Practice. Routledge.

Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.

Myers, S. C. (2001). The Capital Structure Puzzle. Journal of Finance, 39(3), 575–592.

Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.

Fabozzi, F. J., & Peterson Drake, P. (2019). Finance: Capital Markets, Financial Management, and Investment Management. Wiley.