Chapter 13

Question 1

Corporation

Answer 1

An entity that is separate from its owners and has the same rights as a person

Question 2

Privately held and publicly held corporations

Answer 2

• Private: corporation that does not offer its stock for public sale and has few stockholders
• Public: selling and trading stock on an organized stock market such as NASDAQ

Question 3

Separate legal entity

Answer 3

Pertaining to a corporation having the same rights, duties, and responsibilities as a person

Question 4

Limited liability

Answer 4

Stockholders are not liable for corporate actions or debt

Question 5

Transferable ownership rights

Answer 5

Transfers of shares from one stockholder to another has no direct effect on operations except when it causes a change in directors to oversee the corporation

Question 6

Continuous life

Answer 6

Corporation’s life is indefinite because it is not tied to the physical lives of its owners

Question 7

No mutual agency for stockholders

Answer 7

Shareholders cannot bind the corporation to contracts (as they are not officers and managers = lack of mutual agency)

Question 8

Capital accumulation

Answer 8

Increase in assets from investments or profits

Question 9

Corporate disadvantages

Answer 9

• Government regulation and laws
• Additional taxes via federal and state corporate income taxes , plus often double taxed as the corporate income is taxed a second time as part of stockholders’ personal income when they receive dividends

Question 10

Incorporators or promoters

Answer 10

Prospective stock holders that file a charter

Question 11

Board of directors

Answer 11

Elected by stockholders, responsible for overseeing corporate activities and is in charge of hiring/firing key executives who manage day-to-day operations

Question 12

Proxy

Answer 12

A document that gives a designated agent the right to vote the stock

Question 13

Specific and general rights

Answer 13

• Specific = rights under the corporation’s charter
• General = rights under state law

Question 14

Rights of stockholders’ ownership of common stocks

Answer 14

• Sell or dispose of their stock
• Purchase their proportional share of any common stock issued later
• Receive the same dividend on each common share

Question 15

Stock certificate

Answer 15

Proof of share ownership, not very common anymore

Question 16

Registrar

Answer 16

Individual (banks or trust companies) that keeps a list of stockholders for a meetings and dividend payments

Question 17

Transfer agent

Answer 17

Individual (banks or trust companies) that assists with purchases and sales of shares

Question 18

Capital stock

Answer 18

Shares issued to obtain capital

Question 19

Authorized stock

Answer 19

Number of shares that a corporation’s charter allows it to sale

Question 20

Outstanding sock

Answer 20

Stock held by stockholders/investors

Question 21

Issuing stock

Answer 21

Stock that has been sold, directly (stock to buyers) or indirectly (pay a investment banker to sell stock)
*Some investment bankers UNDERWRITE stock, buy it from the corporation and resell it to investors

Question 22

Market value per share

Answer 22

Price at which stock is bought and sold

Question 23

Par value stock

Answer 23

Stock that has a par value, which is an amount assigned per share by the corporation per charter

Question 24

Minimum legal capital

Answer 24

The least amount that the buyers of stock must contribute to the corporation or be at risk to pay creditors at a future date

Question 25

No par value or stated stock

Answer 25

Stock not assigned an amount by the corporate charter but you may be registered in state that requires a minimum legal state value per share

Question 26

Paid in capital or contributed capital

Answer 26

Total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock

Question 27

Retained stock

Answer 27

Cumulative net or loss not distributed as dividends to its stockholders

Question 28

Preferred stock

Answer 28

- More paid per share to get privileges - Preferred stockholders get dividends before, often guaranteed dividend percentage - Preference for receiving dividends and assets in liquidation - But you give up your vote

Question 29

Reasons for stock dividend

Answer 29

- Keep stock affordable by increasing the number of outstanding shares, which lowers the per share stock price - Shows management's confidence that the company is doing well and will continue

Question 30

Date of declaration

Answer 30

Vote to declare and pay a dividend, legal liability

Question 31

Date of record

Answer 31

Date for identifying those stockholders to receive dividends

Question 32

Date of payment

Answer 32

Date payment is submitted and recorded by the corporation

Question 33

Small stock dividend

Answer 33

Distribution of 25% or less of previously outstanding shares, equal to market value

Question 34

Large stock dividend

Answer 34

Distribution of more then 25% of previously outstanding shares for the par or stated value of the stock

Question 35

Why issue a stock dividend?

Answer 35

- Continue dividends conserve cash - Reduce the market price per share - Reward investors

Question 36

Issued shares =

Answer 36

Outstanding + treasury shares

Question 37

Why would you want to buy stock back?

Answer 37

- Use the shares to acquire another corporation - Avoid takeover of the company - Provide as compensation to employees - Maximize supply and demand

Question 38

Restricted retained earnings (statutory and contractual)

Answer 38

S = A limit to treasury stock purchases to the amount of retained earnings C = A loan agreement that restricts paying dividends beyond a specified amount of retained earnings

Question 39

Appropriated retained earnings

Answer 39

A voluntary transfer of amounts from retained earnings account to the appropriated retained earning account to inform users of special activities that require funding

Question 40

Statement of stockholder's equity

Answer 40

Lists the beginning and ending balances of key equity accounts and describes the changes that occur during the period

Question 41

Continued operations

Answer 41

Operations that should continue from period to period. Income from continuing operations helps investors make predictions about future operations.

Question 42

Discontinued operations

Answer 42

These gains and losses occur when a company sells or disposes of an identifiable division.

Question 43

Earning per share equation

Answer 43

Net income - preferred dividends / weighted average number of common shares outstanding

Question 44

Earnings per share definition (net income per share)

Answer 44

The income earned per share of outstanding stock

Question 45

Price-earnings ratio definition

Answer 45

Metric to determine if the company's stock is over or undervalued

Question 46

P/E ratio equation

Answer 46

Market price per share / earnings per share MPS = current trading price of individual stock share EPS = company's net income divided by outstanding shares

Question 47

Income stocks

Answer 47

Stocks that provide a return of large dividends on a regular basis

Question 48

Growth stocks

Answer 48

Pay little or no cash dividends but are attractive to investors because of expected stock price increases

Question 49

Dividend yield definition

Answer 49

A measure to determine if a stock is a growth or an income stock

Question 50

Dividend yield equation

Answer 50

Annual cash dividends per share / market value per share