ACCT 701 Module 6 Notes - Module 6 Chapter 12 13 Common Stock o All classes of stock are designated as either common stock or preferred stock o

ACCT 701 Module 6 Notes - Module 6 Chapter 12 13...

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Module 6: Chapter 12 & 13 Common Stock: o All classes of stock are designated as either common stock or preferred stock. o These come with different financial benefits and provide different rights regarding the governance of the corporation. o When a corporation is formed, a single class of stock , known as common stock , is usually issued. o Corporations may later find that there are advantages to issuing one or more additional classes of stock with varying rights and priorities. Stock with certain preferences (rights) over common stock is called preferred stock . o The primary rights for owners of common stock are: Voting in the election of the board of directors. You will recall that the board controls the operating and financial policies of the company. Sharing in the profits and dividends of the company. Stock appreciation : The value of the stock increases above the price initially paid o (Of course, it is also possible that the stocks’ value decreases if the company is unprofitable – this is a risk of owning stock). Dividends : Dividends are payments to a company’s shareholders from earnings. These payments are usually in the form of cash, but non-cash assets and stock can also be given as dividends. o Payment of dividends to common shareholders, however, depends on a company’s alternatives. Preferred Stock: o Preferred stock generally pays a regular dividend. o Preferred stock is a less risky investment than common stock. o Preferred shareholders also receive priority over common shareholders in the payment of dividends and the distribution of assets in the event of liquidation. o The term preferred stock is somewhat misleading because it gives the impression that preferred stock is better than common stock. Preferred stock isn’t better – it’s different. Preferred stockholders give up many of the rights of ownership in exchange for some of the protection enjoyed by creditors. o Rights of ownership given up by preferred stockholders are: Voting – In most cases, preferred stockholders are not allowed to vote for the board of directors. Sharing in success – The cash dividends received by preferred stockholders are usually fixed in amount. Therefore, if the company does exceptionally well, preferred stockholders do not get to share in the success. Preferred dividend preferences: o Preferred dividend preferences can take three forms: 1. Current dividend preference 2. Cumulative dividend preference 3. Participating dividend preference Current dividend preference: o Preferred stock always has a current dividend preference , which provides that current dividends must be paid to preferred stockholders before any dividends are paid to common stockholders. o However, the current dividend preference does not guarantee payment of preferred dividends.

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