Ch. 11 Acct HW 1 Q's

What factors help determine the market value of stock?

Any factor which the "market" feels is important can affect market price

List 3 corporate characteristics that are considered to be advantages of the corporate form of organization.

Ease of raising capital; unlimited life, limited liability, professional management, ease of transfer of ownership shares

List 3 corporate characteristics that are considered to be disadvantages of the corporate from of organization

Inability to change management, harder to form, governmentalregulation, double taxation

What is market value?

Market value is the price investors are willing to pay for shares of stock

What is par value?

Par value is the legal capital per share amount chosen by the corporation and printed on the stock certificates

List 3 ways that preferred stock differs from common stock.

Preferred is non-voting, preferred has a pre-determined dividend rate, preferred always has a par value, preferred has preference over common in dividend distributions and distributions made during liquidation, preferred is typically cumulative and callable and may be convertible.

Define the term "dividends in arrears".

A dividend in arrears is an unpaid dividend on preferred stock.

Describe the participating feature of preferred stock

The participating feature allows the preferred shareholders to receive dividends in excess of their pre-determined amount in years in which "excess" cash distributions are made.

Why do corporations have a legal capital requirement?

This is to protect corporate creditors because of limited liability.

Describe how the cumulative feature of preferred stock works.

When a dividend is paid (or if the corporation goes into liquidation) all dividends in arrears must be paid first.

Why is common stock usually not issued at a price that is less than par value?

Because the shareholders would become personally liable for the difference and the corporation must notify them of that fact—it is assumed it would be hard to find any investors.

What is book value?

Book value is the total shareholders' equity divided by the number of shares outstanding.

What is callable preferred stock?

Callable preferred stock may be retired at the discretion of the issuing corporation.

Does common stock have a cumulative feature?

Common stock does not have a cumulative feature.

What is convertible preferred stock?

Convertible preferred stock can be exchanged for share of the issuing corporation's common stock.

Why would a corporation issue callable preferred stock?

Corporations issue callable preferred stock so that they can "re-finance" in the future if they wish.

Why would a corporation issue BOTH common stock and preferred stock?

Corporations issue preferred stock simply to have additional financing options available to them—different types of investors are attracted to the preferred stock versus the common stock

Why would a corporation issue convertible preferred stock?

Corporations issued convertible preferred to make the preferred stock more attractive and may allow the stock to be issued with a lower dividend rate.

How are dividends in arrears presented in the financial statements?

Dividends in arrears are reported in the notes that accompany the financial statements.

Why would financial statement readers want to know if there are preferred dividends in arrears?

Dividends in arrears information is important because it is indicative of some type of cash flow problem within the corporation.