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2. Double taxation Transferability of ownership Limited liability of owners Ability to raise capital Separate legal entity Corporate Characteristics 1 2 3 4 5 Regulation 6

3. Common Stock Contributed Capital Common Stock Stockholders Investors who become owners of the corporation by purchasing stock The amount raised by issuing capital stock. The most common type of capital stock

4. Stock Descriptions Authorized Shares Issued Shares Outstanding Shares The number of shares of stock that a company can legally issue. The number of shares a company has distributed to owners to date. The number of shares that have been issued and are still held by someone other than the issuing company.

5. Stockholders’ Rights When a corporation issues common stock, it usually grants to stockholders the following four rights: the right to vote the right to participate proportionally in dividends the right to participate proportionally in residual assets the right of preemption

6. Par Value Par value is an arbitrary value. Par value determines an entity’s legal capital, or the amount that a state requires a corporation to maintain to protect creditor claims. Most companies set par value very low. For example, Walgreens has a $0.078125 par value for common stock. While most states still require corporations to set the par value for its stock, the value has lost much of its legal significance over time. Because par is so low, common stock is usually issued for more than par, with one account showing the par value and a second account recording the excess paid over par.

7. Recording Common Stock Assume that a company issues 100 shares of $1 par value stock for $5 per share on April 5. The company would record this issuance as follows:

8. No-Par Stock Assume that a company issues 100 shares of no-par stock for $500 on April 5. The company would record this issuance as follows:

9. Dividend FAQs Dividends are normally paid in cash, but they can also be paid in other forms such as stock. When dividends are distributed, they are stated as a per share amount. Dividends are paid only on outstanding shares of stock. When and how a company distributes dividends is called a company’s dividend policy.

10. Cash Dividends A cash dividend is a distribution of cash to stockholders. When a corporate board decides that a cash dividend is warranted, it will declare publicly that a dividend will be distributed. Dates Associated with Dividends Date of Declaration: date on which the board declares the dividend and a liability is created Date of Record: date on which those who receive the dividends are identified Payment Date: date on which the dividend will be distributed

11. Recording Cash Dividends Assume that a company with 1,000,000 outstanding shares of stock declares a $0.05 per share dividend on November 3. The dividend is payable on November 30 to stockholders of record on November 21.

12. Large Stock Dividends vs. Small Stock Dividends Small Stock Dividend Large Stock Dividend < 25% > 25% Record at Market Value Record at Par Value

13. Stock Splits A stock split is an increase in a company’s shares of stock according to some specified ratio. It is generally used in place of a stock dividend when the company wants to decrease the market price of its stock to make it more affordable. For example, a company that declares a 2-for-1 split recalls all shares from existing stockholders and issues two shares in return, effectively doubling the shares outstanding and cutting the per share par value in half. A company declaring a 2-for-1 stock split on its $0.50 par value stock would reduce its par value in half to $0.25. The reduction in the per share par value then allows total par value to remain unchanged.

14. Preferred Stock While all corporations issue common stock, many also authorize the sale of preferred stock. Preferred stock is a form of capital stock that receives one or more priorities over common stock. Preferred stockholders relinquish the right to vote in exchange for preference to dividends and preference to assets upon liquidation of the company. Preference to dividends means that preferred stockholders receive their dividends before common stockholders receive any dividends.

15. Cash Dividends on Preferred Stock When a company has both preferred and common stock outstanding, cash dividends must be allocated between the two. Here are a few terms related to this allocation: Cumulative preferred stock carries the right to receive current-year dividends and all unpaid dividends from prior years before dividends are paid to common stockholders. D ividends in arrears are the accumulated value of unpaid prior-year dividends. Noncumulative preferred stock carries the right to receive current-year dividends only.

16. Treasury Stock The common stock that a company reacquires from stockholders is treasury stock. Because shares of treasury stock are no longer held by an external investor, they are no longer outstanding, but they are issued stock. One of the most common reasons is to acquire shares that can be issued to employees under the company’s stock compensation plans.

17. Recording Treasury Stock Purchase Assume that Bahakel Inc. purchases 1,000 shares of its own common stock on May 3 when the stock is trading for $32 per share. Bahakel would record the purchase as follows:

18. Recording Treasury Stock Reissuance Treasury stock is sometimes reissued at a later date. Assume that that Bahakel reissued 100 shares of its treasury stock for $40 per share on July 22. The company would record this transaction as follows:

19. Earnings Per Share

20. Return on Equity

21. Dividend Payout Ratio

22. Dividend Yield

23. End of Chapter 10