STOCKHOLDER EQUITY

Chapter 11

Corporation

The corporation form of Ownership was created to

overcome some of the disadvantages of sole trader and
partnership
So the corporation is legally separated from its owners.
Defined corporation as An artificial being, invisible,
intangible, and existing only in contemplation of law.

A corporation is a separate and legal entity apart from its owners

it can buy, hold and sell property in its own name.

Advantages of corporation

Greater Permanency (Unlimited Life).

Limited liability.

Easy to transfer ownership.

Attraction of huge capital.

Better Management function.

Recognized legal entity.

Higher profits.

Etc.

Disadvantages of Corporation

Formation of a corporation is complicated.

Double taxation.

Exploitation of share holders.

Separation of ownership from control.

Promotion of frauds.

Stock exchange speculation.

Lack of secrecy.

1. Common Stock:

A security that represents ownership in a corporation.

While in UK they are known as Ordinary Shares

Features of Common Stock:

Voting Right

Limited Liability.

Residual Claim

Right to receive dividend payments (Not fixed)

The power to sell the stock (liquidity rights)

Preemptive Rights

Unlimited life.

2. Preferred Stock:

Stock that entitles the holder to a fixed dividend, whose

payment takes priority over that of common-stock dividends

Stock whose holders are guaranteed with payment of

dividends but have no voting rights

Features of Preferred Stock

Preference in dividends.

Preference in assets in the event of liquidation.

Fixed dividends

Some time convertible to common stock.

Properties of both an equity and a debt instrument (Hybrid

Financing)

Callable at the option of the corporation.

Non-voting Rights

Important Terms Used in Shareholder Equity

Section:
1. Donated capital:
An account showing capital given to a corporation for which no
payment has been made and for which no capital stock has
been
issued in exchange.
2. Paidin capital:
The amounts invested in a corporation by its stockholders.
3. Par value (or stated value)
The legal capital of a corporation. Represents the minimum
amount
per share invested in the corporation by its owners.
4. Retained earnings:
The element of owners equity in a corporation that has
accumulated
through profitable business operations.

Important Terms Used in Shareholder Equity

Section:Contt
5. Stock split:
An increase in the number of shares outstanding with a
corresponding
decrease in par value per share. A 2for1
stock split will give each stockholder twice as many shares as
previously owned.
6. Treasury stock:
Shares of a corporations stock that have been issued and
then reacquired, but not canceled
7. Book value per share:
Common stockholders equity by the number of common
shares
outstanding.

THANKS