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1

separate legal entity (corporations)

own assets, incur liabilities, enter into contracts, sue and be sued

2

governance (corporations)

stockholders (owners of voting shares) elect Board of Directors; Board appoints Presidents (CEO), CFO, etc.

3

stockholders have the right to...

vote and receive dividends (dependent on the type of stock they own)

4

how can you finance a company?

borrowing money
selling ownership

5

what are the advantages of issuing equity?

1. ease of raising capital
2. dividend flexibility
3. return on investment

6

ease of raising capital

ready capital markets to buy/sell; great number of potential investors

7

dividend flexibility

dividends are NOT liabilities until declared by the Board

8

return on investment

ROI is usually higher on stocks than bonds (more attractive to investors)

9

what are the disadvantages of issuing equity?

1. control
2. no tax incentive
3. effective on key ratios

10

control

issuing additional shares of stock dilutes ownership control

11

no tax incentive

dividends are not tax deductible whereas interest expense is tax deductible

12

effect on key ratios

EPS "earnings per share"

13

authorized shares

MAXIMUM number of shares that can be sold to the public

14

issued shares

TOTAL number of shares issued (sold) to the stockholders since formation

15

outstanding shares

number of shares held by OUTSIDE shareholders

16

treasury stock

shares of the company's own stock that were originally issued (sold) and have now been bought back and are being held by the company

17

treasury stock is a ______ to _____

reduction
SHE

18

how do you solve for outstanding shares?

issued shares-treasury stock

19

par value

1. a nominal value that establishes "legal capital"
2. protests creditors
3. par is usually below anticipated selling price
4. may indicated a "stated value"

20

"legal capital"

the amount of capital that must remain invested in the business
(set in the corporation's articles of incorporation)

21

how does par value protect creditors?

by limiting the amount of assets than can be distributed to shareholders before liquidation

22

par is usually below anticipated selling price

when selling price exceeds par, the excess is APIC

23

preferred stock

"first dibs" on dividends to preferred shareholders

24

common stock

only class of stock with voting rights

25

additional paid in capital (APIC)

excess of selling price over par value

26

contributed capital

preferred stock
common stock
additional paid in capital

27

earned capital

retained earnings
- increased by net income
- decreased by net losses and dividends

28

IPO-Initial Public Offering

the first time a corporation sells stock to the public

29

what is the most famous IPO this century?

Facebook

30

secondary markets

transactions between two investors buying and selling the company's stock (these transactions do not affect the corporations accounting records)