B - Equites

Question 1

CORPORATE CHARTER

Answer 1

Every company must certify and file its corporate charter with the Secretary of the State in which the company intends to be incorporated. The CORPORATE CHARTER provides a description of the company’s purpose, the articles of incorporation, by-laws, and other material information at the time of incorporation.
A provision must be made in the charter for the number of shares and par value or stated value of stock that will be issued by the corporation. This provision of stock must first be authorized by the corporate charter and then registered with the SEC (Securities Exchange Commission). Stock must then be registered with the SEC before it is issued, offered, or sold to the public.

Question 2

BOARD OF DIRECTORS

Answer 2

Every corporation has a BOARD OF DIRECTORS who are elected by the stockholders/owners of the company. The board of directors is responsible for advising the company and appointing officers to carry out corporate policies. If the board is considered successful in fulfilling its duties, the board members will be re-elected to serve another term on the board of directors. If the current board members are deemed unsuccessful in fulfilling their duties, new members are elected to take their place.

Question 3

CAPITALIZATION

Answer 3

CAPITALIZATION indicates the company’s sources of funds for long-term use.

Question 4

EQUITY CAPITAL

Answer 4

The company receives EQUITY CAPITAL through the sale of stocks.

Question 5

DEBT CAPITAL

Answer 5

The company receives DEBT CAPITAL through the sale of bonds.

Question 6

EARNED SURPLUS

Answer 6

The company receives EARNED SURPLUS through retained profits.

Question 7

EQUITY

Answer 7

The term EQUITY means ownership; a corporation’s equity is composed of shares of preferred stock and shares of common stock that are issued by the company.

Question 8

SHAREHOLDERS

Answer 8

SHAREHOLDERS are the owners of the company, and the number of shares owned by an investor constitutes the amount of ownership the investor has in the company.

Question 9

COMMON STOCK

Answer 9

Every corporation must issue COMMON STOCK. Corporations issue common stock to establish ownership and to raise money to do business. The holders of common stock elect the board of directors.

Question 10

Investors buy common stock in one of two ways:

Answer 10

• When it is issued by the corporation (the company receives the money from the sale).
• Through the securities market (the seller, usually another investor or a broker/dealer, receives the money from the sale).

Question 11

People buy common stock because they want to:

Answer 11

• Be owners of the company.
• Earn income through dividends, if they are paid (yield).
• Profit from any potential appreciation in the value of the stock (capital gains).

Question 12

AUTHORIZED STOCK

Answer 12

AUTHORIZED STOCK is the maximum number of shares of stock that has been authorized for issuance by the corporate charter.

Question 13

UNISSUED STOCK

Answer 13

An additional number of shares that can be issued with the approval of the common stockholders.

Question 14

ISSUED STOCK

Answer 14

ISSUED STOCK is authorized stock that has been issued to shareholders in either private placements or public offerings.

Question 15

OUTSTANDING STOCK

Answer 15

OUTSTANDING STOCK is shares of the company that are owned by investors. These are shares of stock that have been issued and sold by the company to either employees of the company or members of the public, and have not been replaced by the company itself. Therefore, outstanding stock is issued stock minus any treasury stock that has been bought back by the corporation. Voting rights and dividend payments are only available to holders of outstanding shares.

Question 16

TREASURY STOCK

Answer 16

TREASURY STOCK is shares of stock that have been issued by the corporation but repurchased by the company to reduce the amount of outstanding stock; therefore, shares of treasury stock are no longer considered outstanding. Treasury stock is not eligible to receive any dividends nor does it have any voting rights, which includes the elections of the members of the board of directors. Treasury stock appears on the balance sheet as an informational item because it can be used for acquisitions or employee stock options. The board of directors determines when stock that is issued as outstanding shares will be bought back as treasury stock.

When a corporation repurchases stock the market value of the stock will generally rise. This occurs because there are now less shares outstanding and there will be a greater demand for them.

Question 17

A company may buy back stock for any of the following reasons:

Answer 17

• To distribute for stock option plans
• For use in acquisitions or takeovers
• To increase the earnings per share, which should increase the market value of the outstanding stock

Question 18

PAR VALUE

Answer 18

PAR VALUE is a bookkeeping term used to show the dollar value assigned to the issued and outstanding common and preferred stock on the balance sheet.

Question 19

Common stockholders have the following rights:

Answer 19

• The right to receive dividends, if dividends are declared by the board of directors and paid by the corporation (dividends are not guaranteed to any shareholder)
• The right to elect the board of directors and to vote on major management decisions, such as a change in the nature of the business
• The right to maintain their proportionate ownership in the corporation, known as the preemptive right
• The right to transfer ownership in their stock (sell or give their stock to someone else)
• The right to receive copies of the corporation’s annual report
• The right to inspect the financial records of the corporation

Question 20

CLOSELY HELD

Answer 20

A company is defined as being CLOSELY HELD when only a few people hold a majority of the stock. The public can purchase outstanding stock, but only a small quantity of shares is freely traded. Buying shares or trying to sell shares for this type of company can be difficult. Stock that allows few public shareholders is referred to as THINLY TRADED STOCK.

Question 21

THINLY TRADED STOCK

Answer 21

Stock that allows few public shareholders is referred to as THINLY TRADED STOCK.

Question 22

Preferred stock differs from common stock in four major ways:

Answer 22

• In the case of liquidation, preferred stockholders are always paid off before common stockholders.
• Preferred stockholders are paid dividends before common stockholders.
• Different types of preferred stock may provide additional rights to the preferred stockholders.
• Preferred stockholders have limited voting rights.

Question 23

Four different preferred stock features can be issued. You should be aware of these different features:

Answer 23

• Cumulative preferred
• Convertible preferred
• Callable preferred
• Participating preferred

Question 24

CUMULATIVE PREFERRED STOCK

Answer 24

CUMULATIVE PREFERRED STOCK is a preferred stock that will pay dividends every year, when declared by the board of directors. In the event that a dividend payment is either missed or partially paid, the unpaid portion of the dividend will accrue until fully paid. No dividends can ever be paid to common stockholders until cumulative preferred stock is completely paid up on all past and current dividends.

Cumulative preferred stock is the only preferred stock that will receive past dividends that have been missed. The word “cumulative” means that missed dividends “accumulate” until paid in full.

Question 25

CONVERTIBLE PREFERRED STOCK

Answer 25

CONVERTIBLE PREFERRED STOCK can be converted (exchanged) into shares of common stock if requested by the holder of the preferred stock.

The company cannot force a preferred stockholder to convert the shares. However, the preferred stock will tend to change in price as the common stock changes, both increasing in value and decreasing in value. This is because the preferred stock will “trade at parity” with the common stock — trading at a price that makes the two stocks equal based on the individual stock prices, combined with the number of shares of preferred stock and the common stock, respectively.

Question 26

A CONVERSION RATIO

Answer 26

A CONVERSION RATIO is used to determine the number of common shares a holder of preferred stock can get for a convertible preferred stock. This ratio is calculated as follows: Divide the par value of the preferred stock by the conversion price. The answer is represented as a number of common shares for each share of preferred.

Question 27

CALLABLE PREFERRED STOCK

Answer 27

CALLABLE PREFERRED STOCK is preferred stock that gives the company the option (provision) to call the stock back at any time. If the company exercises the call, it must pay a predetermined amount, usually the par or the par plus a premium. Most preferred stock is issued with a CALL PROVISION (printed in the prospectus and on the stock certificate at the time the stock is issued.