Chapter 11: Stockholders' Equity

Preferred stock

A class of capital stock with priority over common stock in dividend payments and in the distribution of assets in the event of a corporation liquidation.

Articles of incorporation

A document prepared by the founders of a corporation that sets forth the structure and purpose of the corporation and specifics regarding the type and quantity of capital stock to be issued.

Cumulative

A feature associated with preferred stock whereby any dividends-in arrears must be paid before any dividends may be paid on common stock.

Convertible

A feature associated with preferred stock whereby the preferred stock can be converted into common stock at a specified conversion rate.

Callabe

A feature associated with preferred stock whereby the preferred stock can be redeemed by the issuing corporation at a price specified in the stock contract.

Participating

A feature associated with preferred stock whereby the preferred stock can share any special dividend distribution with common stock beyond the regular preferred stock dividend rate.

Return on common stockholders' equity

A financial ratio computed as (net income - preferred stock dividends) divided by average common stockholders' equity.

Dividend payout ratio

A financial ratio showing the percentage of net income available to common stockholders that is paid out as dividends; calculated as the annual dividend per share divided by earnings per share.

Statement of stockholders' equity

A financial statement presenting information regarding the events that cause a change in stockholders' equity during a period. The statement presents the beginning balance, additions to, deductions from, and the ending balance of stockholders' equity for the period.

Statement of Retained earnings

A financial statement showing the financial changes that occurred in retained earnings during the accounting period.

Corporation

A legal entity created under the laws of a state or the federal government. The owners of a corporation receive shares of stock as evidence of their ownership interest in the company.

Stated value

A nominal amount that may be assigned to each share of no-par value stock and accounted for much as if it were a par value.

Dividend yield

Annual dividend per share divided by the market price per share.

Treasury stock

Shares of a corporation that have been acquired for purposes other than retiring (cancelling) the stock. Treasury stock is recorded at cost and is deducted from stockholders' equity on the balance sheet.

Outstanding shares

Shares of stock that are currently held by stockholders.

Issued shares

Shares of stock that have been sold and issued to stockholders; issued stock may be either outstanding or held in the treasury.

No-par value stock

Stock that does not have a par value.

Paid-in capital

The amount of capital contributed to a corporation by its stockholders in excess of its par value or stated value.

Common stock

The basic ownership class of capital stock , carrying the right to vote, share in earnings, participate in future share issues, and share in any liquidation proceeds after all more senior claims have been settled.

Retained Earnings

The earnings of a corporation that have been retained in the corporation (have not been paid out as a dividend for future corporate use.

Authorized shares

The maximum number of shares in a class of stock that a corporation may issue.

Preemptive right

The right of a stockholder to maintain his or her proportionate ownership interest in a corporation by having the right to purchase an appropriate quantity of shares in any new share issue.

Forward stock split

Additional shares of capital stock issued by a corporation to its current stockholders in proportion to their current ownership interest without changing the balances in the related stockholders' equity accounts. A forward stock split increases the number of shares outstanding and reduces proportionately the stock's par value per share.

Stock dividends

Additional shares of capital stock issued by a corporation to its current stockholders in proportion to their existing ownership interest.

Par value

An amount specified in the corporate charter for each class of stock and imprinted on the face of each stock certificate; often determines the legal capital of a corporation.

Dividends

Distribution of assets (usually cash) or stock from a corporation to its stockholders.