Page 210 - Finance for Non-Financial Managers

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Financing the Business
shares (stock dividends) or both. Generally, however, such
extras need not be paid to the preferred shareholders. The
tradeoff for the preference is the restriction on enjoying the fruits
of success. These restrictions have the effect of also restricting
the market price appreciation of preferred shares, since they
cannot participate in a company’s dynamic growth as much as
the common shares.
One feature sometimes added to preferred shares offsets
this limitation. Some companies issue convertible preferred
stock. These shares act like preferred shares until their owners
decide to convert them, under provisions not unlike those built
into the convertible debt discussed above. Once the holders
convert their shares, the preference ends and they participate
like other common stockholders, for better or worse. Typically,
as with convertible debt, strong success is the best inducement
to getting preferred shareholders to convert their shares. Once
the preferred shares are converted, the company no longer has
to reserve earnings for preferred dividends and can pay out
those dollars as common stock dividends or retain them for
expansion, repayment of debt, or any other corporate purpose.

Manager’s Checklist for Chapter 11
❏ Borrowing rule no. 1: Lending is a very competitive busi-
ness. Always shop for a loan, even if your favorite banker
has made you an offer you can’t refuse, unless saving
money is not an important objective.
❏ Borrowing rule no. 2: Borrow short-term money only for
short-term needs. Don’t get caught with overdue loans
because the long-term project they were financing has taken
longer than expected to pay off.
❏ Perhaps the most expensive form of short-term borrowing
for businesses is factoring, the sale of accounts receivable to
the lender: rates can go as high as 5% a month and paper-
work requirements are substantial.
❏ Leasing equipment and buying equipment on installments