Equity Securities Flashcards
Who takes on more risk? Why? A. General creditors B. Bond holders C. Common stockholders D. Preferred stockholders
C. Common stockholders
They are junior to all other parties. Last to be paid.
Known as residual claim to assets.
What is a treasury stock?
Previously outstanding shares which have to be purchased from the secondary market and stored by the board of directors.
What is common stock?
What is it also called?
Last to be paid if corporation is liquidated through bankruptcy.
It is also called junior security.
What are stocks also known as?
Equity securities
What is a stock or share?
Stock is considered an ongoing instrument.
Share represents ownership in a corporation.
Stock share will exist as long as the corporation exists.
What are bonds also known as?
Debt instruments
Or
Leverage instruments
What is a bond?
A loan to the corporation, creating a liability for the corporation.
Bond holders are creditors to the corporation?
What is the significance of a maturity date with bonds?
It is when the corporation repays bond holder and the bond ceases to exist
What is total capitalization?
Sum of all stocks and bonds issued to raise operating capital
What are the two net worth equations?
Asset= liabilities+net worth
Assets-liabilities= net worth
Bankruptcy priority
- Employees bank wages
- Internal Revenue Service (IRS)
- Mortgages and lien holders that have specific claim to assets
- Secured bond holders
- Unsecured bond holders or general creditors
- Subordinated debentures
- Preferred stockholders
- Common stockholders
What is the maximum stockholders can lose?
Price paid for the stock
Known as “limited liability”
The total number of shares authorized in the corporate charter
Authorized share
Portion of total authorized shares that are actually sold to investors
Issued shares
Authorized shares that have not yet been sold
Unissued shares
Stock that has been sold and bought back by corporation
Treasury stock
What is the purpose of treasury stock?
Fund employee bonus plans
Or
Distributed to stockholders in lieu of a cash dividend
NO VOTING RIGHTS!!!
Number of shares in the hands of investors at any given time?
Outstanding stock
Equation for outstanding stocks
Outstanding stock= issued shares- treasury stock
Number of outstanding common share x the market price per share
Market cap (capitalization)
Rights of common stockholders?
- right to vote through proxy
- right to transfer ownership
- right to receive dividends once declared
- right to inspect corporation’s books
- preemptive right
- junior claim to corporate assets in the event of liquidation
What issues are voted on?
- Election of board of directors
- changes in operations for the company
- stock splits
- issuance of additional securities
What is voting by proxy?
Limited power of attorney stockholder grants to someone else
Have authority to vote at their discretion or instruction of stockholder
What is the difference between statutory and cumulative voting?
Statutory: shareholders permitted one vote for each share they own for each vacancy.
Cumulative: shareholder has the same total number of votes but may divide them among the vacancies in any way they desire.
