An overview of corporate financing - Common stock

8 important questions on An overview of corporate financing - Common stock

What are intermediaries that hold company stocks?

  • Mutual funds
  • Pension finds
  • Insurance companies

Who has the cashflow rights?

The stockholder. If the CEO holds all stocks its the CEO. As soon as the company borrows money, the company has to payback the bank incl interest.

The residual claim on the firms assets and cashflow is for the stock holders

Can banks impose restrictions on companies when borrowing them money?

Yes, they can limit the firm from future borrowing, selling of assets or paying dividend. However, they can never restrict or determine all the operating and investment decisions required to run an efficient operation. The  residual right of these decisions remains with the stock owner
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Who has the residual right when there are thousands of stockholders?

The stockholders have the residual right. However, the right is usually limited to an entitlement to vote. For example to appoint the board of directors etc.

How often do boards get reelected?

Once a year, unless its a classified board, than the only one third of the board is up for re-election.

What is the objection against classified boards?

Staggered elections make it more difficult to change / replace management.

What are dual-class shares

Shares have Cashflow rights and Control rights. Dual-class shares have the same cashflow rights but different control rights. For example, public shares have 1 vote right each while shares hold by the founders have 10 vote rights each.

What is reverse stock split?

Reverse stock split occur when a publicly traded company deliberately divides the number of shares investors are holding by a certain amount, which causes the company's stock price to increase accordingly.

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