Long-Term Financing∶ An Introduction.pptVIP

Chapter Outline 14.1 Common Stock 14.2 Corporate Long-Term Debt: The Basics 14.3 Preferred Stock 14.4 Patterns of Financing 14.5 Recent Trends in Capital Structure 14.6 Summary and Conclusions 14.1 Common Stock Par and No-Par Stock Authorized versus Issued Common Stock Capital Surplus Retained Earnings Market Value, Book Value, and Replacement Value Shareholders’ Rights Dividends Classes of Stock Par and No-Par Stock The stated value on a stock certificate is called the par value. Par value is an accounting value, not a market value. The total par value (the number of shares multiplied by the par value of each share) is sometimes called the dedicated capital of the corporation. Some stocks have no par value. Authorized vs. Issued Common Stock The articles of incorporation must state the number of shares of common stock the corporation is authorized to issue. The board of directors, after a vote of the shareholders, may amend the articles of incorporation to increase the number of shares. Authorizing a large number of shares may worry investors about dilution because authorized shares can be issued later with the approval of the board of directors but without a vote of the shareholders. Capital Surplus Usually refers to amounts of directly contributed equity capital in excess of the par value. For example, suppose 1,000 shares of common stock having a par value of $1 each are sold to investors for $8 per share. The capital surplus would be ($8 – $1) × 1,000 = $7,000 Retained Earnings Not many firms pay out 100 percent of their earnings as dividends. The earnings that are not paid out as dividends are referred to as retained earnings. Market Value, Book Value, and Replacement Value Market Value is the price of the stock multiplied by the number of shares outstanding. Also known as Market Capitalization Book Value The sum of par value, capital surplus, and accumulated retained earnings is the common equity of the firm, usually referred to as the book value of the fi