-PRINCESS DELOS SANTOS
Chapter 8: Corporate Stocks
3 Classification of Capital Requirements
1. short term
3. long term
Stock Financing-when shares of stock are sold to raise funds for the long term financing requirements of the firm. Capital Stock, Dividends, and Retained Earnings
CAPITAL STOCK- interest of the owners of a corporation.
-Issued Stock- portion of the authorized stock has been issued and sold. - Unissued Stock- those which are not yet issued.
DIVIDENDS- the net income of a corporation maybe distributed to the stock holders. There are times, when the profits are not declared as dividends. Instead, it is RETAINED in the company’s coffers for use in some of its capital financing requirements. This is reported as RETAINED EARNINGS in the company’s balance sheet. CLASSES OF CORPORATE STOCKS
2 Major Classes
* Common Stock
* Preferred Stock
COMMON STOCK- class of stock issued by all corporations and which presents the real equity capital. It has a residual claim to earnings and assets and which carries the risk of business success or failure. Varieties of Common Stock
1. Classified Common Stock
2. Deferred Stock
3. Voting Trust Certificate
4. Guaranteed Stock
5. Debenture Stock
Classified Common Stock-Common Stock maybe classified to suit various requirements of issuing firm and investors. Deferred Stock- Minor type of issue which entitles the holder to receive dividends, and in the event of dissolution, assets, after the common stockholders have been paid. Voting Trust Certificates- Given to trustees of a corporation when the activities of the corporation are entrusted to them. Guaranteed Stocks-Stock of corporation wherein the payment of dividends is guaranteed by another corporation. Debenture Stock- not stock in the real sense, but a debt issue similar to debenture bonds. They are fixed interest securities issued by limited companies in return for long term loans. The redemption date of debenture falls between 10-40 years from the date issue. TYPES OF DEBENTURES
* Fixed debentures- secured by specific asset.
* Floating Debentures- secured by a charge on the assets of the firm. * Convertible debenture- carries an option at a fixed future to convert the stock into common shares at a fixed price.
Advantages of Common Stock Financing
1. It does not entail fixed charges.
2. There is no fixed maturity date attached to common stock financing. 3. The firms credit standing is enhanced with the sale of common stock. 4. There are times when common stock is easier to sell than debt. Disadvantages of Common Stock Financing
1. It gives new shareholders the right to share control of the corporation. 2. It has a dilutive effect on the corporation’s earnings per share and price per share. 3. It has more expensive to underwrite and distribute common stock than preferred stock or debt. 4. There is a risk that investors may perceive negatively the issuance of common stock resulting to a fall in the price of the stock. Preferred Stock-Class of stock which has a claim on assets before common stock, in the event that the firm is dissolved; and it also has a prior claim to dividends up to a specified amount or rate. Provision of Preferred Stock
1. Claim to dividends
2. Voting rights
3. Subscription rights
CLAIM TO DIVIDENDS- the preferred stock has a basic advantage of prior claim to dividends. The preferred stockholders are entitled to a fixed dividend before common stockholders receive their dividends. Classification
* Cumulative- a cumulative preferred stock accumulates dividends even if it is not paid for years. When dividends are declared, the accumulated dividends must be paid first before paying any common stockholders. * Non-...
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