Large corporations which are emphasized in the

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Unformatted text preview: raded, this occurs infrequently and in small amounts. Large corporations, which are emphasized in the following discussions, are publicly owned, and their shares are generally actively traded on the major securities exchanges described in Chapter 1. Par Value Unlike bonds, which always have a par value, common stock may be sold with or without a par value. The par value of a common stock is a relatively useless value established for legal purposes in the firm’s corporate charter. It is generally quite low, about $1. Firms often issue stock with no par value, in which case they may assign the stock a value or record it on the books at the price at which it is sold. A low par value may be advantageous in states where certain corporate taxes are based on the par value of stock; if a stock has no par value, the tax may be based on an arbitrarily determined per-share figure. Preemptive Rights The preemptive right allows common stockholders to maintain their proportionate ownership in the corporation when new shares are issued. It allows existing shareholders to maintain voting control and protects them against the dilution of their ownership. Dilution of ownership usually results in the dilution of earnings, because each present shareholder has a claim on a smaller part of the firm’s earnings than previously. In a rights offering, the firm grants rights to its shareholders. These financial instruments permit stockholders to purchase additional shares at a price below the market price, in direct proportion to their number of owned shares. Rights are used primarily by smaller corporations whose shares are either closely owned or publicly owned and not actively traded. In these situations, rights are an important financing tool without which shareholders would run the risk of losing their proportionate control of the corporation. From the firm’s viewpoint, the use of rights offerings to raise new equity capital may be less costly and may generate more interest than a public offering of stock. Authorized, Outstanding, and Issued Shares A firm’s corporate charter indicates how many authorized shares it can issue. The firm cannot sell more shares than the charter authorizes without obtaining approval through a shareholder vote. To avoid later having to amend the charter, firms generally attempt to authorize more shares than they initially plan to issue. Authorized shares become outstanding shares when they are held by the public. If the firm repurchases any of its outstanding shares, these shares are recorded as treasury stock and are no longer considered to be outstanding shares. Issued shares are the shares of common stock that have been put into circulation; they represent the sum of outstanding shares and treasury stock. CHAPTER 7 EXAMPLE Stock Valuation 311 Golden Enterprises, a producer of medical pumps, has the following stockholders’ equity account on December 31: Stockholders’ Equity Common stock—$0.80 par value: Authorized 35,000,000 shares; issued 15,000,000 shares $ 12,000,000 Paid-in capital in excess of par 63,000,000 Retained earnings 31,000,000 $106,000,000 Less: Cost of treasury stock (1,000,000 shares) Total stockholders’ equity 4,000,000 $102,000,000 How many shares of additional common stock ca...
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