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Chapter One | Overview of Financial Statement Analysis 17

or more individuals or organizations. Public offerings in- Equity Financing
volve selling shares to the public. There are significant 20
costs with public offerings of shares, including govern- 15
ment regulatory filings, stock exchange listing require- 10
ments, and brokerage fees to selling agents. The main $ Billions 5
benefit of public offerings of shares is the potential to 0
raise substantial funds for business activities. Many 5 Albertson’s Target Colgate FedEx
corporations offer their shares for trading on organized 10
exchanges like the New York, Tokyo, Singapore, and
London stock markets. Colgate’s common stock
trades on NYSE under the symbol CL. The chart in the Contributed Reinvested Total
margin above showsthemakeupofequityfinancingfor
selected companies. Negative amounts of contributed capital for Colgate indicate that
repurchasesofcommonstock(calledtreasurystock)haveexceededcapitalcontributions.
Companies also obtain financing from creditors. Creditors are of two types: (1) debt
creditors, who directly lend money to the company, and (2) operating creditors, to whom
the company owes money as part of its operations. Debt financing often occurs through
loans or through issuance of securities such as bonds. Debt financers include organiza-
tions like banks, savings and loans, and other financial or nonfinancial institutions. Oper- SCAM SOURCING
ating creditors include suppliers, employees, the government, and any other entity to According to regulators, the
whom the company owes money. Even employees who are paid periodically, say weekly five most common ways
or monthly, are implicitly providing a form of credit financing until they are paid for their investors get duped are
efforts. Colgate’s balance sheet shows total creditor financing of $7.73 billion, which is (1) unlicensed securities
dealers, (2) unscrupulous
about 85% of its total financing. Of this amount, around $3.67 billion is debt financing, stockbrokers, (3) research
while the remaining $4.06 billion is operating creditor financing. analyst conflicts,
Creditor financing is different from equity financing in that an agreement, or (4) fraudulent
contract, is usually established that requires repayment of the loan with interest at spe- promissory notes, and
cific dates. While interest is not always expressly stated in these contracts, it is always (5) prime bank schemes.
implicit. Loan periods are variable and depend on the desires of both creditors and
companies. Loans can be as long as 50 years or more, or as short as a week or less.
Like equity investors, creditors are concerned with
return and risk. Unlike equity investors, creditors’ re- Creditor Financing
turns are usually specified in loan contracts. For exam-
25
ple, a 20-year, 10%, fixed-rate loan means that creditors 20
receive a 10% annual return on their investment for 15
20 years. Colgate’s long-term loans are due from 2007 $ Billions 10
to 2011 and carry different interest rates. The returns of 5
equity investors are not guaranteed and depend on the 0
level of future earnings. Risk for creditors is the possibil- Albertson’s Target Colgate FedEx
ity a business will default in repaying its loans and inter-
est. In this situation, creditors might not receive their Operating debt Debt Total
money due, and bankruptcy or other legal remedies
could ensue. Such remedies impose costs on creditors.

ANALYSIS VIEWPOINT . . . YOU ARE THE CREDITOR
Colgate requests a $500 million loan from your bank. How does the composition of
Colgate’s financing sources (creditor and equity) affect your loan decision? Do you have
any reluctance making the loan to Colgate given its current financing composition?
[Note: Solutions to Viewpoints are at the end of each chapter.]