Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Kenneth R. Szulczyk

 Convertible Stock – a stockholder can convert preferred stock into common stock on a

specific date in the future.

Issuing of stock allows corporations to garner large amounts of financial capital.
Furthermore, a corporation can raise capital by issuing bonds. A bond is a loan. However, a
bond is standardized, allowing investors to buy or sell bonds on the financial markets.
Moreover, a bondholder has two rights. First, a corporation pays interest on the bond, regardless
of a corporation’s financial position. Second, a corporation pays the face value of the bond on a
specific date in the future. If a corporation bankrupts or it is dissolved, subsequently, the
corporate debts are paid first that include bonds, bank loans, and taxes. If any assets remain,
then the preferred stock holders are paid, and finally, the common stockholders are last.
Corporations can buy other corporations. For instance, a parent corporation can have many
subsidiaries, and the parent company does not fully integrate the subsidiaries into the parent
corporation. Corporations develop these complex structures because of lawsuits, taxes, and
regulations. Unfortunately, lawsuits are common and excessive in the U.S. If a successful
lawsuit bankrupts a subsidiary, only that subsidiary is impacted. For example, a judge sued a dry
cleaner for $65 million because the dry cleaner lost his pants. Although the dry cleaner found
the judge’s pants a week later, the lawsuit bankrupted the dry cleaner. In another example, a
corporation owns 10 different apartment complexes. A corporation establishes each apartment
complex as a separate, legal entity. If a tenant is injured on one property, he or she can sue the
complex that limits the lawsuit to one subsidiary.
Stockholders, of course, want a good return for their investment. A return reflects an
investor’s profit stated in annual percentage terms, and it has two sources: Dividend yield and
capital gains. A dividend yield converts the dividend into a percentage. For example, you
received $1 per share on your Facebook stock with a value of $20 per share. Dividend equals D;
the stock price is P, and t indicates today’s time. We calculate your dividend yield as 5% in
Equation 1.

5 %

$ 20

$ 1

100   100  

t

t

P

D

dividendyield= ( 1 )

Investors could earn a capital gain, which means they can sell their stock for a greater price
than the amount they paid for it. For example, you bought your Facebook stock for $18 per
share last year and sold it this year for $20. We compute a capital gain of 11.1% in Equation 2.
Notice the subscripts; t represents today while t-1 represents last year. If the investment does not
exactly equal one year, then we must adjust the capital gain. For instance, if your investment
lasted for two years, subsequently, you would divide the capital gain by 2, converting it into an
annual return.

11. 1 %

$ 18

$ 20 $ 18

100 100

1

 ^1    





t

t t

P

P P

capitalgain= ( 2 )