CPA #12 Notes
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This 3 page Class Notes was uploaded by Callie Lusk on Tuesday October 4, 2016. The Class Notes belongs to FIN 330 at Western Kentucky University taught by Rhoades in Fall 2016. Since its upload, it has received 3 views. For similar materials see Print of finance management in Finance at Western Kentucky University.
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Date Created: 10/04/16
FIN 330 Exam #2 Preparation CPA #12 Notes Terms Equities: funds provided by the firm’s owners (investors or stockholders) that are repaid subject to the firm’s performance. o A firm can obtain an equity either internally, by retaining earnings rather than paying them out as dividends to stockholders, or externally by selling common or preferred stock. o Unlike debt, equities are a permanent form of financing for the firm. It does not mature, so repayment is not required. Common Stock o Sometimes referred to as “residual owners” o They are assured that they cannot lose any more than they have invested in the firm. Ownership o Privately owned: the common stock of a firm is owned by private investors; this stock is not publicly traded. Private companies are often closely owned by an individual investor or a small group of private investors. o Publicly owned: the common stock of a firm is owned by public investors; this stock is publicly traded. Public companies are widely owned by many unrelated individuals or institutional investors. Par Value o The arbitrary value established for legal purposes in the firm’s corporate charter and is generally set quite low, often an amount of $1 or less. When a firm sells new shares of common stock, the par value of the sold shares is recorded in the capital section of the balance sheet as part of the common stock. Setting a low par value is advantageous in states where certain corporate taxes are based on the par value of stock. Preemptive Rights o Allow common stockholders to maintain their proportionate ownership in the corporation when new shares are issued, thus protecting them from dilution of their ownership. A dilution of ownership is a reduction in each previous shareholder’s fractional ownership resulting from the issuance of additional shares of common stock. Preexisting shareholders experience a dilution of earnings when their claim on the firm’s earnings is diminished as a result of new shares being issued. Firms grant rights to shareholders; they allow shareholders to purchase additional shares at a price below the market price. Authorized, Outstanding, and Issued Shares o A firm’s charter indicates how many authorized shares it can issue. o To avoid later having to amend the charter, firms generally attempt to authorize more shares than they initially plan to issue. Authorized shares become outstanding shares when they are issued or sold to investors. If the firm repurchases any of its outstanding shares, these shares are recorded as treasury stock and are no longer considered to be outstanding shares. Issued shares are the shares of common stock that have been put into circulation; they represent the sum of outstanding shares and treasury stock. o Voting rights are granted to common stock shareholders. Many small shareholders are unable to attend the annual meetings for voting and they have the option to sign a proxy statement that transfers their votes to another party. Occasionally, when a firm is widely owned, outsiders may wage a proxy battle to unseat the existing management and gain control of the firm. A firm can use different classes of stock as a defense against a hostile takeover in which an outside group, without management support, tried to gain voting control of the firm by buying its shares in the market-place. Supervoting shares have multiple votes per share and allow insiders to maintain control against an outside group whose shares have only one vote each. A class of nonvoting common stock is issued when the firm wishes to raise capital through the sale of common stock but does not want to give up its voting control. Dividends o Most corporations that pay dividends pay them quarterly. Dividends must be paid in cash, stock, or (rarely) merchandise. Firms may now pay larger dividends to shareholders, who are subject to a maximum tax rate of 39% in effect prior to passage of the act. Preferred Stock o Gives its shareholders certain privileges that make them senior to common stockholders. Preferred stockholders are promised a fixed periodic dividend, which is stated either as a percentage or as a dollar amount. Specification depends on the par value. o Par-value preferred stock has a stated face value, and its annual dividend is specified as a percentage of this value. o No-par preferred stock has no state face value, but its annual dividend is stated in dollars. o Preferred stock is often considered quasi-debt because much like interest on debt, it specifies a fixed periodic payment (dividend). Preferred stock has no maturity date. Because they have a fixed claim on the firm’s income that takes precedence over the claim of common stockholders, preferred stockholders are exposed to less risk. o Preferred stockholders are not given a voting rate, but they are sometimes allowed to elect one member of the board of directors. o Most preferred stock is cumulative with respect to any dividends passed. If preferred stock is noncumulative, passed dividends do not accumulate. o Preferred stock can be callable or convertible. Callable feature allows the issuer to retire outstanding shares within a certain period of time at a specified price. Conversion feature of stock allows holders to change each share into a stated number of shares of common stock, usually any time after a predetermined rate.
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