Chapter 11 Flashcards
What is the normal balance for SE accounts?
Credit
What does the Statement of Stockholder’s Equity show?
shoes the changes in a company’s equity over a specific period of time
What account is treasury stock?
Contra SE account
Why would a company choose debt financing?
This includes bank loans
- preserve the ownership of their company
- Tax benefits
- Flexibility in Financing
Why would a company choose equity financing?
Smaller companies cannot get bank loans and must turn to the public, however, they are having to give up parts of their ownership.
What is common stock?
represents a type of equity security that signifies ownership in a company
What is the par value of the stock
refers to the nominal or face value assigned to each share of stock by the company at the time the stock is issued
What is the difference between the initial market for stock and the secondary market for stock?
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)
What is stock repurchase?
when a company buys back its own outstanding shares from the open market or from its shareholders.
Why do firms repurchase their shares?
- to increase their EPS (decrease the amount of outstanding shares)
Do firms have to pay common stock dividends?
No!!
Why do they pay dividends?
- attract long-term investors
- income for shareholders
Are dividends an expense?
HELL NO!!
What is the declaration date?
The date where the board says that they are paying a dividend.
What is the record date?
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.
What is the payment date?
The date when the shareholder gets the money
Which dates require journal entries?
Declaration date and payment date
What is stock split (2:1)?
You get 2 stocks for the price of 1
Is a journal entry necessary for a stock split?
nope bbg ◡̈
What is the effect on the number of shares and on per share (EPS) amounts of a stock split?
It cuts it half
What is preferred stock?
a hybrid between debt and equity
How are dividends calculated for preferred stock?
Net income - preferred dividends/average common stock
How are dividends calculated for preferred stock?
Fixed dividend ratethe face value pricethe number of shares
What is return on equity?
how the company is doing
How do you calculate ROE?
net income/ending stockholders’ equity
What is the price to equity ratio? (P/E)
What you are getting for your money
What does it mean when the P/E is high?
The firm is growing and is a glamour stock
What does it mean if the P/E is low?
the growth of the firm is going down, and the company is considered a value stock
What is the difference between value and glamour stock?
Value - older company that does not have a lot of growth
Glamour - a new company that is growing at very good rates
