FINAL - chapter 3 - Common Stock

Question 1

advantages of common stock financing

Answer 1

less risky than bonds financing
directors decide if dividends gets paid
> if company doesn’t pay dividends, it can reinvest the cash

Question 2

disadvantages of stock financing

Answer 2

dividends paid are not tax deductible
issuing stock dilutes ownership

Question 3

dividends

Answer 3

the distribution of money to stockholders when the corp. earned a profit

Question 4

par value

Answer 4

arbitrary value assigned to a share by the company

Question 5

common stock

Answer 5

has voting rights
is the company’s residual equity

Question 6

preferred stock

Answer 6

has priority over common stock in:
receiving dividends
receiving assets of the business if the business goes bankrupt

Question 7

IPO - initial public offering

Answer 7

> a business wants to issue stock
they go to an UNDERWRITER, who, for free, tries to sell their stock for a higher market value than the par value
the underwriter’s pay is the difference between the par value and market value