chapter11notes - CORPORATIONS STOCKHOLDER'S EQUITY I EQUITY...

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CORPORATIONS & STOCKHOLDER'S EQUITY I. EQUITY AS A SOURCE OF FINANCING A company can either issue stock (equity) or issue debt (liability) as a Source of financing the company's operations. A. Advantages of issuing Equity: 1. Ease of raising capital - 2. Dividend flexibility - B. Disadvantages of issuing Equity: 1. Control - 2. No tax incentive - 3. Effect on key ratios - II. STOCKHOLDER'S EQUITY
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Two Sources of Equity Capital 1. Contributed Capital - investments by stockholders 2. Earned Capital - earnings retained in the business (Retained Earnings) Retained Earnings a. Increased by Net Income (with a credit) b. Decreased by net losses & dividends (a debit) Beginning Retained Earnings $ XX + Net Income (- Net Loss) XX - Dividends (XX) Ending Retained Earnings $ XX Sample Stockholders’ Equity section of Balance Sheet: Preferred Stock (# shares issued x $ par) $ XX Common Stock (# shares issued x $ par) XX Additional Paid in Capital: Preferred XX Common XX Treasury XX Total Contributed Capital XX Retained Earnings XX Treasury Stock (# shares x $ cost) (XX) Total Stockholders’ Equity XX
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III. CAPITAL STOCK 1. Authorized Shares - total # of shares that may be issued 2. Issued Shares - total # of shares issued to stockholders since formation 3. Outstanding Shares - # of shares held by outside stockholders 4. Treasury Stock - IV. RIGHTS OF STOCKHOLDERS A. Common Stock (basic rights): 1. Voting rights 2 . Dividends - right to receive share of corp. earnings as their return on investment (ROI) 3. Preemptive Right - right to maintain a proportionate ownership interest when new shares are issued. 4. Liquidation - Right to a proportionate share of assets upon liquidation B. Preferred Stock (basic rights): 1. Dividend Preference - right to receive a dividend before common stockholders 2. Liquidation Preference 3. No voting rights
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V. ISSUANCE OF STOCK 1. Par Value: a. Establishes the corporations "legal capital" (minimum that must be maintained in SHE) THIS IS NOT CASH. b. Protects creditors by limiting the amount of assets that can be distributed to shareholders before liquidation c. Par is usually below anticipated selling price Examples: 1. Sold for par: (market price = par) Example: Sold 1,000 shares @ $10 par 2. Sold stock for > Par Sold 1,000 shares, $1 par for $15/share: 3. Stock issued for non-cash asset: Record at FMV of stock traded or FMV of asset received, whichever is a better indicator of market value.
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