Equity Financing

Equity Financing - Equity Financing Corporations obtain...

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1 Equity Financing Corporations obtain financing from two major sources: debt (financing from borrowing) and equity (financing from investors). A company can borrow money, but then it is obligated by law to make fixed principal and interest payments, and if it misses a payment, bad things can happen: creditors can demand full payment, and may even require that the company be liquidated (all assets sold) and the money used to pay them off. If a company obtains financing from investors, there is no legal obligation to repay them. However, the investors, unlike the creditors, may share in the wealth of the company. A business may be organized as a sole proprietorship , a partnership , or a corporation . We will focus on the corporate form of organization. Corporations Corporations have many advantages and disadvantages as discussed in your text, especially the concepts of separate legal entity, transferability of ownership, limited liability, and double taxation. Publicly owned corporations are subject to many government regulations. There are two major types of stock: common stock and preferred stock. Preferred stock usually has a fixed dividend rate, and the dividend must be paid before the common stockholders receive any dividends. It is also limited in the amount that can be recovered in the event the company is dissolved. However, the dividend does not have to be paid at all if the company so desires. Common stock does not have a fixed dividend rate or a fixed dissolution value. Stock issuance Stockholders’ equity is composed of two major parts: contributed capital and retained earnings.
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Equity Financing - Equity Financing Corporations obtain...

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