Chapter 14 Long term financing

Chapter 14 Long term financing - Chapter 14 Long-term...

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Chapter 14 Long-term financing: An Introduction 14.1 Common Stock Common stock – no special preference in either dividends or in bankruptcy Par and No-Par Stock Shareholders or stockholders receive stock certificates for the shares they own par value is the value stated on the owners’ certificates; some stocks have no par value total par value is the number of shares issued multiplied by the par value of each share and is sometimes referred to as dedicated capital of a corporation Authorised versus Issued Common Stock shares of common stock are the fundamental ownership units of the corporation articles of the corporation must state no. of shares of common stock the corporation is authorised to issue although not all authorised shares must be issued no legal issues to authorizing shares, but o some states impose taxes based on number of authorised shares o authorising a large number of shares may create concern on the part of investors, because authorised shares can be issued later with the approval of the board of directors , but without a vote of the shareholders Capital Surplus usually refers to amount of directly contributed equity capital in excess of par value par value, in contrast to capital surplus, is locked and cannot be distributed to stockholders except upon liquidation of the corporation in most states stock cannot be issued below par value→capital in excess is never negative Retained Earnings money retained in the company and not paid out as dividends accumulated retained earnings + capital surplus + par value = common equity common equity of a firm is also referred to as the firm’s book value Market Value, Book Value and Replacement Value market value is the value at which the stock is traded at the stock market replacement value refers to the current cost of replacing the assets of the firm market, book and replacement value are equal when a firm purchases an asset market value of assets / replacement value of assets ( Tobin’s Q) and market / book value are indicators of the success of a firm (successful if greater than one) Shareholder Rights the conceptual structure of the corporation assumes that shareholders elect directors who in turn elect corporate officers (management) cumulative voting - permits minority participation o The total number of votes that each shareholder may cast is determined by multiplying the number of shares owned by the number of directors to be elected
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