Lesson 3

Question 1

consists of funds provided by the firm’s owners (investors or
stockholders) and is repaid subject to the firm’s performance.
This is the shareholders’ equity portion in the statement of financial
position which is the residual value of the company after deducting the
liabilities from the assets.

Answer 1

Equity

Question 2

This refers to the maximum amount stated in the articles of
incorporation as authorized by SEC that can be subscribed by investors
of a corporation.
A corporation cannot issue additional shares in excess of the authorized
capital stock unless it files amendment of the articles of incorporation
and seeks approval from SEC.

Answer 2

Authorized capital stock

Question 3

This refers to the total shares of stocks held by shareholders.

Answer 3

Outstanding shares

Question 4

These are shares that are repurchased or bought back by the company from
its shareholders.

Answer 4

Treasury shares

Question 5

These refer to all shares that were issued by the company, whether
outstanding or treasury shares.

Answer 5

Issued shares

Question 6

This refers to the rise in the value of an asset in relation to the
increase in its market price. Since shares can be sold in the
secondary market, investors may sell shares they originally bought
from a corporation to prospective investors at an agreed price.
Example: Mr. A bought 1,000 shares at P10. Six months later, the price
of the shares appreciated to P12. This means that if Mr. A sells its
shares, he will earn a realized income of P2 per share.

Answer 6

Capital appreciation

Question 7

• These are payments made by corporations to shareholders representing
the earnings of the company.
• Usually paid quarterly, but some companies pay it semi-annually or
annually.
• These are recommended by management and approved by the board of
directors.
• These can be in the form of cash, property or own shares of the company.
• are not dependent on capital appreciation of the shares; it is
based on the current performance of the business. It may be declared
even if the share price is going down as long as long as approved by the
board of directors.

Answer 7

Dividends

Question 8

• Its holders have the distinct rights to be prioritized over ordinary
shares in terms of liquidation.
• It has fixed periodic dividend payments.
• It has no voting rights, but holders of these shares can also have
voting rights at the option of the corporation.
• These are treated as quasi-debt where dividends associated with
the shares are like interest payments on a debt.

Answer 8

Preference share

Question 9

dividends in arrears and the current dividend should be
paid to preference shareholders before paying the ordinary
shareholders.

Answer 9

Cumulative

Question 10

allows the issuing corporation to retire or repurchase
outstanding shares within a predetermined period of a time at a
specified price.

Answer 10

Callable

Question 11

allows shareholders to convert the preference shares
to a stated number of ordinary shares after a certain date.

Answer 11

Convertible

Question 12

These represent the true ownership of the corporation which is
called the residual value to be received by the common stock
shareholders after all claims of creditors and preference
shareholders on the net assets are satisfied.

Answer 12

Ordinary shares

Question 13

• Dividends are not guaranteed unlike the preference shareholders.
• Ordinary shareholders have limited liability where their obligation is up to
the amount they have invested.
• High returns in terms of dividends when the company is earning.
• It has voting rights to decide on certain corporate decisions. One share is
equivalent to one vote.
• It has pre-emptive rights where ordinary shareholders are permitted to
retain their proportionate share in the company in case of new share
issuances, protecting them from being diluted of ownership.
• It has a stock right to exercise the pre-emptive right..

Answer 13

TYPES OF SHARES
These are the salient features of ordinary shares:

Question 14

are instruments issued by companies to provide current
shareholders with the opportunity to preserve their fraction of
corporate ownership.
A _ is a financial instrument which permits shareholders to buy
additional shares from the company in direct proportion to the shares
they own.

Answer 14

Stock rights

Question 15

are long-term instruments that also allow shareholders to
purchase additional shares of stock. are usually offered in
conjunction with fixed income securities and act as a “sweetener,” or
financial enticement to purchase a bond or preferred stock.

Answer 15

Warrants

Question 16

The is composed of exchanges and over the counters
where shares are issued and traded publicly. This can be:
- Physical and virtual
- Primary and secondary

Answer 16

stock market

Question 17

The physical site where shares are purchased and sold face to face on a
trading floor is called a stock exchange.
An over-the-counter market refers to the market wherein shares can be
traded by dealers that are connected electronically by computers.
The overall performance of a stock market is measured through stock
market indexes which represents the average of stock prices currently
being traded. Investors use stock market indexes to gain some insights
on how a group of stocks could have performed in the market.

Answer 17

stock market

Question 18

The physical site where shares are purchased and sold face to face on a
trading floor is called a stock exchange.
An over-the-counter market refers to the market wherein shares can be
traded by dealers that are connected electronically by computers.
The overall performance of a stock market is measured through stock
market indexes which represents the average of stock prices currently
being traded. Investors use stock market indexes to gain some insights
on how a group of stocks could have performed in the market.

Answer 18

stock market