Stockholders' Equity Review

Flashcards for reviewing Stockholders' Equity lecture notes.

Corporation Advantages

Ease of raising capital, simple to become an owner, easy to transfer ownership, and provides limited liability.

Stockholder Benefits

Voting rights, dividends, residual claims, and preemptive rights.

Equity Financing Advantages

Equity does not have to be repaid and dividends are optional.

Debt Financing Advantages

Interest on debt is tax deductible and debt does not change stockholder control.

Authorized Shares

The maximum number of shares of capital stock that can be issued to the public.

Issued Shares

Authorized shares of stock that have been distributed to stockholders.

Unissued Shares

Shares that have never been distributed to stockholders.

Treasury Shares

Issued shares that have been reacquired by the corporation.

Outstanding Shares

Issued shares that are owned by stockholders.

Par Value

An arbitrary amount assigned to each share of stock when it is authorized.

Initial Public Offering (IPO)

The first time a corporation issues stock to the public.

Seasoned Equity Offering (SEO)

Subsequent issues of new stock to the public.

Stock Repurchase Reasons

Send a signal that the company believes its stock is worth acquiring, obtain shares to reissue for the purchase of other companies, obtain shares to reissue to employees as part of stock option plans, reduce the number of outstanding shares to increase per-share measures of earnings.

Dividend Declaration Requirements

Declared by board of directors, not legally required, creates liability at declaration, requires sufficient Retained Earnings and Cash.

Dividend Key Dates

Declaration Date, Date of Record, Date of Payment, Year End

Stock Dividends Characteristics

No change in total stockholders’ equity, no change in par values, all stockholders retain same percentage ownership. Distribution of additional shares of stock to stockholders

Small Stock Dividend

Stock dividend < 25%, recorded at current market value of stock

Large Stock Dividend

Stock dividend > 25%, recorded at par value of stock

Stock Splits

An increase in the number of shares and a corresponding decrease in par value per share. Retained earnings is not affected.

Preferred Stock Characteristics

Priority over common stock, usually has a fixed dividend rate, different voting rights.

Current Dividend Preference

The current preferred dividends must be paid before paying any dividends to common stock.

Cumulative Dividend Preference

Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

Earnings per Share (EPS) formula

(Net Income − Preferred Dividends) / Average Number of Common Shares Outstanding