Chapter 13 Flashcards
Corporation
An entity that is separate from its owners and has the same rights as a person
Privately held and publicly held corporations
- Private: corporation that does not offer its stock for public sale and has few stockholders
- Public: selling and trading stock on an organized stock market such as NASDAQ
Separate legal entity
Pertaining to a corporation having the same rights, duties, and responsibilities as a person
Limited liability
Stockholders are not liable for corporate actions or debt
Transferable ownership rights
Transfers of shares from one stockholder to another has no direct effect on operations except when it causes a change in directors to oversee the corporation
Continuous life
Corporation’s life is indefinite because it is not tied to the physical lives of its owners
No mutual agency for stockholders
Shareholders cannot bind the corporation to contracts (as they are not officers and managers = lack of mutual agency)
Capital accumulation
Increase in assets from investments or profits
Corporate disadvantages
- Government regulation and laws
- Additional taxes via federal and state corporate income taxes , plus often double taxed as the corporate income is taxed a second time as part of stockholders’ personal income when they receive dividends
Incorporators or promoters
Prospective stock holders that file a charter
Board of directors
Elected by stockholders, responsible for overseeing corporate activities and is in charge of hiring/firing key executives who manage day-to-day operations
Proxy
A document that gives a designated agent the right to vote the stock
Specific and general rights
- Specific = rights under the corporation’s charter
- General = rights under state law
Rights of stockholders’ ownership of common stocks
- Sell or dispose of their stock
- Purchase their proportional share of any common stock issued later
- Receive the same dividend on each common share
Stock certificate
Proof of share ownership, not very common anymore
Registrar
Individual (banks or trust companies) that keeps a list of stockholders for a meetings and dividend payments
Transfer agent
Individual (banks or trust companies) that assists with purchases and sales of shares
Capital stock
Shares issued to obtain capital
Authorized stock
Number of shares that a corporation’s charter allows it to sale
Outstanding sock
Stock held by stockholders/investors
Issuing stock
Stock that has been sold, directly (stock to buyers) or indirectly (pay a investment banker to sell stock)
*Some investment bankers UNDERWRITE stock, buy it from the corporation and resell it to investors
Market value per share
Price at which stock is bought and sold
Par value stock
Stock that has a par value, which is an amount assigned per share by the corporation per charter
Minimum legal capital
The least amount that the buyers of stock must contribute to the corporation or be at risk to pay creditors at a future date
No par value or stated stock
Stock not assigned an amount by the corporate charter but you may be registered in state that requires a minimum legal state value per share
Paid in capital or contributed capital
Total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock
Retained stock
Cumulative net or loss not distributed as dividends to its stockholders
Preferred stock
- More paid per share to get privileges
- Preferred stockholders get dividends before, often guaranteed dividend percentage
- Preference for receiving dividends and assets in liquidation
- But you give up your vote
Reasons for stock dividend
- Keep stock affordable by increasing the number of outstanding shares, which lowers the per share stock price
- Shows management’s confidence that the company is doing well and will continue
Date of declaration
Vote to declare and pay a dividend, legal liability
Date of record
Date for identifying those stockholders to receive dividends
Date of payment
Date payment is submitted and recorded by the corporation
Small stock dividend
Distribution of 25% or less of previously outstanding shares, equal to market value
Large stock dividend
Distribution of more then 25% of previously outstanding shares for the par or stated value of the stock
Why issue a stock dividend?
- Continue dividends conserve cash
- Reduce the market price per share
- Reward investors
Issued shares =
Outstanding + treasury shares
Why would you want to buy stock back?
- Use the shares to acquire another corporation
- Avoid takeover of the company
- Provide as compensation to employees
- Maximize supply and demand
Restricted retained earnings (statutory and contractual)
S = A limit to treasury stock purchases to the amount of retained earnings
C = A loan agreement that restricts paying dividends beyond a specified amount of retained earnings
Appropriated retained earnings
A voluntary transfer of amounts from retained earnings account to the appropriated retained earning account to inform users of special activities that require funding
Statement of stockholder’s equity
Lists the beginning and ending balances of key equity accounts and describes the changes that occur during the period
Continued operations
Operations that should continue from period to period. Income from continuing operations helps investors make predictions about future operations.
Discontinued operations
These gains and losses occur when a company sells or disposes of an identifiable division.
Earning per share equation
Net income - preferred dividends / weighted average number of common shares outstanding
Earnings per share definition (net income per share)
The income earned per share of outstanding stock
Price-earnings ratio definition
Metric to determine if the company’s stock is over or undervalued
P/E ratio equation
Market price per share / earnings per share
MPS = current trading price of individual stock share
EPS = company’s net income divided by outstanding shares
Income stocks
Stocks that provide a return of large dividends on a regular basis
Growth stocks
Pay little or no cash dividends but are attractive to investors because of expected stock price increases
Dividend yield definition
A measure to determine if a stock is a growth or an income stock
Dividend yield equation
Annual cash dividends per share / market value per share
