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Chapter 8

Corporate stocks
Stock Financing- when shares of stock are sold to raise funds for the long term
financing requirements of the firm, this activity is referred to as stock financing.

Advantage of stock financing

● Raising long term capital stock financing does not burden to the company with
the pressure of redeeming stocks at the given date.
● Unlike bonds have no maturity periods.

Capital stock, Dividends, And Retained Earnings

● Capital stock-the interest of the owners of a corporation
● Issued stocks – a portion of the authorized stocks which has been issued and
● Unissued stocks- those which are not yet issued

Classes of corporate stocks

● Common stock-is that class of stock issued by all corporations and which
represents the real equity capital.

Varieties of common stocks consist in following:

● Classified common stock
● Deferred stock
● Voting trust certificate
● Guaranteed stock
● Debenture stock
1. Fixed debentures -which are secured by specific assets
2. Floating debentures –which are generally secured by a charge on the
assets of the firm.

Advantages of common stock

● It does not entail fixed charges
● There is no fixed maturity date attached to common stock financing
● The firms credit standing is enhanced with the sale of common stock
● There are times when the common stock is easier to sell than debt

Disadvantage of common stock

● it gives new shareholders the right to share control of the corporation
● it has a dilutive effect on the corporations earning per share and price per share
● it is more expensive to underwrite and distribute common stock than preferred
stock or debt
● there is a risk that may perceive negatively the issuance of common stock
resulting to a fall in the price of the stock.
Preferred stock – is that class of stock which has a claim on assets before common
stock in the event that the firm is dissolved; and it also has a prior claim to dividends up
to a specified amount or rate.

Provisions of Preferred Stock. Certain provisions are incorporated in the preferred stock
which makes them distinguishable from each subclassification and from common stock.
The provision refer to the following:
● claim to dividends
● voting rights
● subscription rights
● callability
● convertibility
● participation; and
● classes

Claim to Dividends
The preferred stock has a basic advantage of prior claim to dividends, preferred stocks
may be classified into two: (1) cumulative and (2) non- cumulative.

Voting Rights
Preferred stockholders, in general, do not have the right to vote. There are instances
when preferred stockholders may vote.

Subscription Rights
In case of additional issues of stock, some preferred stockholders have the right to
subscribe, while others do not have the same right.
1. Those with pre-emptive right; and
2. Those without pre-emptive right.

Preferred stocks may also be classified as either;
● Callable
● Non-callable

Convertibility is just another way of classifying preferred stocks. As such, preferred
stocks may either be:
● Convertible; or
● Non-convertible
Preferred stocks may also have the additional feature of participating or sharing with the
common stock in additional dividends after the preferred stock have been credited with
its regular dividend. As such, preferred stocks may be further classified as follows:
● Participating; and
● Non-participating

Preferred stock may also be issued in different classes for different purposes. For
instance, a preferred share may be identified as class A or B which could mean class A
has certain features that class B does not have.
Advantages of the Preferred Stock Issue
● The claim of preferred stockholders on corporate earnings is usually limited to a
specific amount or rate per share.
● Preferred stockholders are owners and they have no claim that can force the
corporation into bankruptcy proceedings for non-payment of dividends. On the
other hand, when interest on a corporate debt is not paid, the creditors may start
legal to require payment.
Disadvantages of the Preferred Stock Issue
● Dividends are fixed payments and it increases the financial risk of the firm
resulting to increases in the cost of all financing.
● Dividends are not deductible as a tax expense, unlike the interest paid on debt.

Treasury Stock
The major use of treasury stock consists of the following:
● Stock options
● Acquisitions
● Investments
● Stock splits
● Stock dividends; and
● Conversion of convertible securities including warrants

Par Value Stock

The stated value in the shares of corporate stock is called par value. A stock with stated
value is called par value stock.
Par value is important on two counts:
● Establishes the amount due the preferred stockholders in the event of liquidation;
● The preferred dividend is frequently stated as a percentage of the par value.

No Par Value Stock

No par value stocks are those shares of stock without a face or nominal value. When
stocks have no par value, dividends are expressed in peso amounts rather than

Book Value of Stock

Refers to the stated value of a stock based on the accounting concepts of recorded
value as reflected in the balance sheet.

Market Value of Stock

Is the value placed at any one time on a stock traded in a stock exchange or over the
counter, or even between parties in an encumbered transaction without duress.
Economic Value of a Stock
Refers to the value of a stock as reflected by its current and furure earnings power, plus
any potential recovery of all or part of the investment.