Capital Structure

Question 1

What are the two categories of corporate securities?

Answer 1

Equity and debt securities

Question 2

Equity securities

Answer 2

permanent commitments of capital to a corporation. Returns generally depend on the corporation earning a profit.

Question 3

Debt Securities

Answer 3

Capital investment for a limited time. More likely to have priority when it comes to payment if the corporation becomes insolvent or liquidates

Question 4

What are a shareholder’s preemptive rights

Answer 4

The inherent right to maintain their proportionate interest in a corporation.
(a shareholder who owns 10% of shares in a company that newly issues 1,000 shares is entitled to buy 100 new shares.)

Question 5

What is legal capital?

Answer 5

A cushion to ensure that there is enough $ to protect the interest of debtholders. corporation could not “eat into” this cushion of legal capital by paying out too much money to shareholders.

Question 6

What is par value?

Answer 6

A number set by the corporation that is only used for legal capital calculations. ( can even be half a penny)

Question 7

What is watering stock

Answer 7

Issuing overloaded shares (a type of fraud)

Question 8

Liability of directors for violating legal capital requirements

Answer 8

May be held personally liable and can’t be indemnified by the corporation