Chapter 10: Stockholders' Equity Flashcards
Ownership of a corporation is divided into a large number of equal parts or ______.
shares
Most large businesses are organized as corporations because incorporation increases the companies ability to _____ _____ (or capital) by easing the transfer of ownership and limiting the liability of owners.
raise cash
the owners of a corporation who own its shares in varying numbers.
stockholders/shareholders
the owners’ claims against the assets of a corporation after all liabilities have been deducted
stockholders’ equity (or owners’ equity)
Stockholders’ Equity is comprised of what 3 things?
- Capital stock, split between (1) preferred and common stock and (2) the associated additional paid-in capital.
- Retained earnings or deficit
- Treasury stock
Corporations are authorized, or chartered, by _____ laws.
state (Laws vary from state to state)
What is the name of the charter that includes information about the company?
A corporate charter, also called the articles of incorporation
T or F: A company can be chartered in another state from where its headquarters are.
True
All states require persons who wish to form a corporation to apply to a _______ _____ _____ for the issuance of a charter.
prescribed state official
What are the 3 things the corporate charter includes?
- Name and purpose of corporation
- Names of the incorporators
- Authorized Shares
the maximum number of shares that may be issued in each class of stock.
authorized shares
the number of shares actually sold to stockholders/investors (either sold or distributed through stock dividends or stock splits)
issued shares
T or F: A corporation rarely issues all of its authorized shares.
True
The typical corporate charter contains provisions that describe how stock may be issued by the corporation. What are these three provisions?
- First, authorizes the corporation to issue stock in a limited number of classes.
- Second, it sets an upper limit on the number of shares the corporation may issue in each class
- Third, it sets a lower limit on the amount for which each share must be sold.
Shares of stock are sold, or issued, when a corporation is _______. _______ _______ may be issued later.
formed; additional shares
the number of issued shares actually in the hands of stockholders/investors
outstanding shares
How do you calculate the number of outstanding shares?
Outstanding Shares - Shares Reacquired by the Corporation
When firms reacquire their own stock, the reacquired shares (are/ are not) considered to be outstanding.
are not
Stocks are either categorized as ______ or _______. These have different financial benefits and provide different rights regarding the governance of the corporation.
common; preferred
What are the 4 primary rights for owners of common stock?
- To vote for members of the board of directors
- To share in the profits and dividends of the company
- To keep the same percentage of shares of ownership if new shares are issued (preemptive rights)
- To a residual claim in the assets of the company should it be liquidated.
Common stockholders are only paid after the _______ and ________ _______ are paid in full (residual claim). This also means that common stockholders get _________ that is left over after those people are paid in full.
creditors; preferred stockholders; everything
Common stockholders receive the bulk of the financial gain from a profitable company through _____ _____ _______ and __________.
stock price appreciation; dividends
the value of the stock increases above the price initially paid (of course, it is also possible that the stock’s value decreases if the company is unprofitable– this is a risk of owning stock).
stock price appreciation
amounts paid periodically by a corporation to its stockholders as a return of their invested capital
dividends