Chapter 11

Question 1

What is the normal balance for SE accounts?

Answer 1

Credit

Question 2

What does the Statement of Stockholder’s Equity show?

Answer 2

shoes the changes in a company’s equity over a specific period of time

Question 3

What account is treasury stock?

Answer 3

Contra SE account

Question 4

Why would a company choose debt financing?

Answer 4

This includes bank loans

• preserve the ownership of their company
• Tax benefits
• Flexibility in Financing

Question 5

Why would a company choose equity financing?

Answer 5

Smaller companies cannot get bank loans and must turn to the public, however, they are having to give up parts of their ownership.

Question 6

What is common stock?

Answer 6

represents a type of equity security that signifies ownership in a company

Question 7

What is the par value of the stock

Answer 7

refers to the nominal or face value assigned to each share of stock by the company at the time the stock is issued

Question 7

What is the difference between the initial market for stock and the secondary market for stock?

Answer 7

Initial - selling shares to the public straight from the company

Secondary - shareholders’ trading stock amongst themselves (sold at the price at the time being, so not at the beginning price)

Question 8

What is stock repurchase?

Answer 8

when a company buys back its own outstanding shares from the open market or from its shareholders.

Question 9

Why do firms repurchase their shares?

Answer 9

• to increase their EPS (decrease the amount of outstanding shares)

Question 10

Do firms have to pay common stock dividends?

Answer 10

No!!

Question 11

Why do they pay dividends?

Answer 11

• attract long-term investors
• income for shareholders

Question 12

Are dividends an expense?

Answer 12

HELL NO!!

Question 13

What is the declaration date?

Answer 13

The date where the board says that they are paying a dividend.

Question 14

What is the record date?

Answer 14

The date that determines whether or not a shareholder will be paid the dividend.

If the shareholder sells the stock after the record date they can still get the money.

If the shareholder buys the stock after the record date they can’t get the money.

Question 15

What is the payment date?

Answer 15

The date when the shareholder gets the money

Question 16

Which dates require journal entries?

Answer 16

Declaration date and payment date

Question 17

What is stock split (2:1)?

Answer 17

You get 2 stocks for the price of 1

Question 18

Is a journal entry necessary for a stock split?

Answer 18

nope bbg ◡̈

Question 19

What is the effect on the number of shares and on per share (EPS) amounts of a stock split?

Answer 19

It cuts it half

Question 20

What is preferred stock?

Answer 20

a hybrid between debt and equity

Question 21

How are dividends calculated for preferred stock?

Answer 21

Net income - preferred dividends/average common stock

Question 22

How are dividends calculated for preferred stock?

Answer 22

Fixed dividend ratethe face value pricethe number of shares

Question 23

What is return on equity?

Answer 23

how the company is doing

Question 24

How do you calculate ROE?

Answer 24

net income/ending stockholders’ equity

Question 25

What is the price to equity ratio? (P/E)

Answer 25

What you are getting for your money

Question 26

What does it mean when the P/E is high?

Answer 26

The firm is growing and is a glamour stock

Question 27

What does it mean if the P/E is low?

Answer 27

the growth of the firm is going down, and the company is considered a value stock

Question 28

What is the difference between value and glamour stock?

Answer 28

Value - older company that does not have a lot of growth
Glamour - a new company that is growing at very good rates