Chapter 10 Lecture Notes

Flashcards of key vocabulary terms and definitions from the lecture notes.

Corporation

An entity whose existence is separate from its owners.

Easy transfer of ownership

Shares of ownership are traded daily and instantly, without necessary approval of other owners.

Limited liability

Stockholders are not personally responsible for debts of the corporation.

Easy generation of capital

Investors are attracted to the corporate form of business.

Separation of owners and the company

One stockholder cannot jeopardize the other through poor decisions.

Voting

The right to participate in managing the corporation by voting on important issues

Dividends

The right to receive a proportionate part of the corporation’s profits

Liquidation

The right to receive a proportionate part of assets after the corporation pays its liabilities in liquidation

Preemption

The right to maintain one’s proportionate ownership in the corporation

Represents shareholders’ ownership interest in the corporation’s assets.

Paid-In (Contributed) Capital

Contributed by stockholders, includes Common Stock, Preferred Stock, Paid -In Capital in Excess of Par

Retained Earnings

Earned through profitable operations before being paid out as dividends

Common Stock

Stock that has voting rights. Every corporation has it; the basic form of capital stock.

Preferred Stock

Stock that has preferential treatment related to dividends and liquidation.

Authorized Shares

Total number of shares allowed to be issued by the SEC.

Issued Shares

Total number of shares sold.

Outstanding Shares

Total number of shares held by stockholders, and not the company itself

Treasury Stock

Stock purchased by its own company

Retained Earnings

All net income less dividends over the life of a company.

Declaration date

The date on which board of directors announces the dividend. The declaration creates a liability for the corporation.

Date of record

Usually follows the declaration date by a few weeks. Stockholders on the record date could receive dividends

Stock Dividends

Proportional distribution of stock to shareholders. Increase common/preferred stock and decrease retained earnings

Stock Splits

Increase the number of shares of stock authorized, issued, and outstanding. Makes the stock more attractive to potential investors.

Market Value

The price an investor can buy or sell one share of the stock for.

Redemption Value

The price at which the issuer redeem the preferred stock for.

The amount the company has to pay a preferred stockholder when the company liquidates (going out of business).

Book Value per share of common stock

(Total stockholders’ equity – preferred equity)/Number of shares of common stock outstanding

Return on Equity (ROE)

(Net Income − Preferred Dividends)/Average Common Stockholders’ Equity

Shares outstanding

Shares issued- Treasury Stock