The Capital Markets

CH4 A100

Legal rights of Equity investors

• ownership in the company

• share in profits and losses in company

• voting rights/proxy statements

Benefits to Equity Investors

• May receive an increase in the market value of shares

• may receive dividends

Risks to equity investors

• May not receive a satisfactory return on their investment

• May lose all or some of their investment

(Equity) Benefits to Company

• no obligation to repay investors

• do not have to pay dividends

• more investors to spread the risk

(Equity) Risks to the Company

• give up ownership in the company

• may feel pressure to pay dividends

• dividends are not tax deductible

Equity investors

stockholders/shareholders

Legal rights of debt investors

• to receive principal + interest payments

• can “call” the loan

• take claim on companies assets

Benefits to debt investors

• regular interest payments= interest revenue

• secure loan with collateral

• enforce loan covenants

Risks to debt investors

• Payments are not made

• companies may sell assets to pay down loans

• interest rate risk

(Debt) Benefits to company

• retain ownership of the company

• interest expense is tax deductible

• can budget payments

(Debt) Risks to Company

• not being able to make payments

• could hinder cash flow

• sell assets to make payments

Debt investors

• banks

• leasing companies

• bondholders

• creditors