Chapter 10: Stockholders' Equity

redeemable preferred stock

A corporation reserves the right to buy an issue of stock back from its shareholders, with the intent to retire the stock.

treasury stock

A corporation's own stock that it has issued and later reacquired.

DuPont analysis

A detailed approach to measuring rate of return on equity (ROE), calculated as follows: Net profit margin (net income before taxes/net sales) χ total asset turnover (net sales/average total assets) χ leverage ratio (average total assets/average stockholders' equity). The first two components of the model comprise return on assets (ROA).

stockholder

A person who owns stock in a corporation. Also called a shareholder.

stock dividend

A proportional distribution by a corporation of its own stock to its stockholders.

book value (of a stock)

Amount of owners' equity on the company's books for each share of its stock.

stated value

An arbitrary amount assigned to no-par stock; similar to par value.

stock split

An increase in the number of authorized, issued, and outstanding shares of stock coupled with a proportionate reduction in the stock's par value.

return on equity (ROE)

Another name for rate of return on common stockholders equity.

return on assets (ROA)

Another name for rate of return on total assets.

par value

Arbitrary amount assigned by a company to a share of its stock.

president

Chief operating officer in charge of managing the day-to-day operations of a corporation.

bylaws

Constitution for governing a corporation.

double taxation

Corporations pay income taxes on corporate income. Then, the stockholders pay personal income tax on the cash dividends that they receive from corporations.

deficit

Debit balance in the Retained Earnings account.

dividend

Distribution (usually cash) by a corporation to its stockholders.

chairperson

Elected by a corporation's board of directors, usually the most powerful person in the corporation.

board of directors

Group elected by the stockholders to set policy for a corporation and to appoint its officers.

authorized stock

Maximum number of shares a corporation can issue under its charter.

legal capital

Minimum amount of stockholders' equity that a corporation must maintain for the protection of creditors. For corporations with par-value stock, legal capital is the par value of the stock issued.

rate of return on total assets

Net income divided by average total assets. This ratio measures a company's success in using its assets to earn income for the persons who finance the business. Also called return on assets.

rate of return on common stockholders' equity

Net income minus preferred dividends, divided by average common stockholders' equity. A measure of profitability. Also called return on equity.

limited liability

No personal obligation of a stockholder for corporation debts. A stockholder can lose no more on an investment in a corporation's stock than the cost of the investment.

issued stock

Number of shares a corporation has issued to its stockholders.

shareholders

Persons or other entities that own stock in a corporation. Also called stockholders.

cumulative preferred stock

Preferred stock whose owners must receive all dividends in arrears before the corporation can pay dividends to the common stockholders.

market value (of a stock)

Price for which a person could buy or sell a share of stock.

stock

Shares into which the owners' equity of a corporation is divided.

outstanding stock

Stock in the hands of stockholders.

preferred stock

Stock that gives its owners certain advantages, such as the priority to receive dividends before the common stockholders and the priority to receive assets before the common stockholders if the corporation liquidates.

liquidation value

The amount a corporation must pay a preferred stockholder in the event the company liquidates and goes out of business.

paid-in capital

The amount of stockholders' equity that stockholders have contributed to the corporation. Also called contributed capital.

contributed capital

The amount of stockholders' equity that stockholders have contributed to the corporation. Also called paid-in capital.

retained earnings

The amount of stockholders' equity that the corporation has earned through profitable operation of the business and has not given back to stockholders.

common stock

The most basic form of capital stock. The common stockholders own a corporation.

redemption value

The price a corporation agrees to eventually pay for its redeemable preferred stock, set when the stock is issued.

stockholders' equity

The stockholders' ownership interest in the assets of a corporation.