Unit One: Equity Securities Part 2

notes from unit one

Stock Dividends

declared to use cash for research and development

For Stock Dividends: the company issues additional shares of ______________ to its current stockholders instead of __________

common stock, cash

Stock Dividends are NOT taxable but the adjusted cost per share will impact any ____ ______ ____ when the shares are sold

capital gains realized

Where do the shares from stock dividend come from?

the authorized shares or from treasury stock

Product Dividends

rare, but some companies will pay a dividend by sending a sample of the company’s product to shareholders

Declaration Date

When a company’s board approves a dividend payment, it is recognized as the date the dividend was declared, the board might also designate the payable date and the dividend record date

Ex-Dividend Date

Usually, the same as the record date, to receive the dividend, the stock must be purchased before the ex-dividend date, if the stock is purchased on or after the ex-date, the new owner will not be entitled to receive it

Record Date

The stockholders of record (who own the stock) as of the end of the day on the record date receive the dividend distribution

Payable Date

On the payable date, the dividend disbursing agent sends dividend checks to all stockholders whose name appears in the records as owners as of the record date

True or False: a stockholder can cast one vote for each share of stock owned

True

Statutory Voting

Allows a stockholder to cast one vote per share owned for each item on a ballot, such as candidates for the board of directors (needs a simple majority to be elected)

Cumulative Voting

Allows stockholders to allocate their total votes in any manner they choose

Statutory benefits ________ shareholders, whereas cumulative benefits the ________ investor

larger, smaller

Shareholders NEVER vote on ___________

dividend related matters

Formula for number of shareholder votes

number of owed shares * number of open board seats

Cumulative voting improves minority shareholders’ chances of

Influencing voting outcomes

Benefits offered by ownership of common stock:

• capital gains (growth)

• income

• limited liability

Capital Gains

An increase in the market price of a security is a capital gain

Income

dividends paid quarterly to stockholders can be a good source of income for investors and are a major reason for many people invest in stocks

Limited Liability

A shareholder personal asset are not at risk cannot be freed to sell any personal assets to help pay for debts of the business at risk only for the amount that they invested

Name all the risks of owning common stock

• value risk

• decreased or no dividend income

• low priority at dissolution

Value Risk:

the chance that a stock will decline

Decreased or No Dividend Income:

a risk of stock ownership is the possibility of dividend income decreasing or ceasing entirely if the company loses money

Who has the last claim on earnings and no guarantee that dividends will be paid?

Common Stockholders

Low Priority at Dissolution:

a company’s debt and preferred shares are considered senior securities

Preferred Stock is a type of _______ security

equity

Preferred Stock as a _________ rate of return

fixed

Always assume preferred par value is $100 unless stated differently on the exam

I will 🙂

When are preferred dividends paid

quarterly or annually

Preferred dividends have no _______ rights nor ________ rights

voting or preemptive

Straight (noncumulative)

no special features beyond the stated dividend payment, missed dividends are not paid to the holder, no requirement for the company to make up missed dividends

Cumulative

accrues payment (unpaid dividends add up until), accumulate on the company’s books until the corporation’s board of directors decide to pay the when the company resumes dividend payments, cumulative preferred stockholders receive the accrued dividends plus any dividends for the current year before any dividends may be distributed to common stockholders

A preferred stock may be either cumulative or straight, NOT BOTH

straight facts

Callable Preferred

Teh right to call the stock allows the company to replace a relatively high fixed dividend obligation with a lower one when the when the cost of money (interest rate) has gone down

When a corporation calls a preferred stock, ____ _____ cease on the call date

dividend payments

Convertible Preferred

If the owner can exchange the shares for a fixed number of shares of the issuer’s common stock

• generally issued with a lower stated dividend than nonconvertible preferred if the same quality because the investor may have the opportunity to convert a common share and enjoy greater capital gain period

• linked to the value of a common stock

Adjusted Rate Preferred

Usually tied to the rates of other interest benchmarks

• the issuer determines the frequency of the adjustments

• due to the payment adjusting to current interest rates

• the price of the stock remains relatively stable since the rate of return stays in line with other investment options

• LEAST APPROPRIATE choice for investors looking for a FIXED INCOME

Participating Preferred

Offers its owners an additional share of corporate profits after all dividends are paid

Benefits of owning preferred stock include the following:

• dividend preference

• priority at dissolution over common stock

Risks of owning preferred stock include the following:

• purchasing power risk

• interest rate sensitivity