1. Chapter 12 Corporations and Stocks

2. Articles of Incorporation  Require to file with the state going to do business in  Application with details of business  States number of shares that will be sold  Discusses management  When approved becomes a “contract” with the state

3. Stock  Method of raising money for the corporation  Sold to stockholders as a unit of ownership of the corporation  Stock certificate issued  Authorized stock – # of stock per articles of incorporation (charter) that can be sold  Par value – arbitrary amount assigned to each share of stock  Legal capital – equals the # of shares issued x par value

4. Board of Directors  Elected to manage the corporation  Sets policies and procedures  Appoints an audit committee  Delegates day-to-day management to corporate officials

5. Dividends  Distribution of resources back to stockholders usually in the form of cash  Only board of directors have the authority of “declaring” dividends

6. Corporations  Dominate the economy in total $’s of assets and output of goods and services  Start up costs – costs of forming a corporation Include incorporation lawyer fees Stock certificates accountants

7. Advantages  Separate Legal Entity - separate from owners  Limited liability – owners are not responsible  Ease of raising capital  Ease of buying and selling ownership (stock)  Lack of mutual agency – owners cannot enter into contracts for the corporation

8. Advantages  Continuous Existence – life is determined only by its charter and the state laws  Centralized authority and responsibility – board is ultimately responsible  Professional management – management is separate from ownership

9. Disadvantages  Government Regulation – regulated and controlled by the state  Taxation – double taxation (earnings are subject to federal and state income taxes + dividends are taxed when paid)  Limited liability – restricts the ability of a small corporation from borrowing money if creditors lay claim to the assets  Separation of ownership and control – board of directors may not be able to control management or are aware of what management is really doing

10. Initial Public Offering  Initial issue of capital stock  Underwriter – intermediary between the corporation and the investing public (one who guarantees the sale for a fee)

11. Dividend Yield Dividends per Share Market Price per Share Ex: $.98 dividend/share $43.22 market price.98/43.22 = 2.3% or the current return

12. Price per Earnings (P/E) ratio Market price per Share Earnings per Share 43.22/4.73 = 25 times Measure of investor’s confidence in a company’s future or market price is 25 times greater than earnings