Chapter 10 Homework

Why do corporations utilize different forms of equity?

Each form of equity offers a different advantage to the issuing corporation. (For example, the conversion privilege normally allows the issuer to sell the convertible preferred stock with a lower dividend rate than would have been required for comparable stock without a conversion feature. Convertible preferred stock is frequently issued with a call option that entitles the issuing corporation to repurchase the shares should conditions in the marketplace change.)

How do common stock and preferred stock differ?

Preferred stock grants certain privileges to its holders that are not granted to holders of common stock. Common stock confers voting rights. Dividends on common stock are usually more closely correlated with the success of the corporation than are preferred dividends. (Other differences include dividend preferences, conversion privileges, liquidation preferences, call provisions, and denial of voting rights. The first three are usually advantages of preferred stockholders, while the last two are disadvantages.)

Authorized stock represents the

max # of shares that can be issued

What is the difference btw a privately and a publicly held corporation?

one whose stock is held by a relatively small group of private individuals vs. one whose stock is owned/purchasable by the general public.

What are retained earnings (or deficit)?

the accumulated earnings (or losses) over the entire life of the corporation that have not been paid out in dividends to stockholders

Which of the following should be considered when a company decides to declare a cash dividend on common stock?

the cash available and the retained earnings balance

When a company purchases treasury stock, which of the following is true?

the cost of the treasury stock reduces stockholders' equity

What does stockholders' equity represent?

the owners' claims against the assets of a corporation after all liabilities have been deducted

When a company decalers a 3-for-1 stock split, the # of outstanding shares

triples

Why would the number of shares issued be different from the number of shares outstanding?

when a corporation purchases its own previously issued stock, it is called treasury stock. These shares are no longer outstanding

What is treasury stock?

when a corporation purchases its own previously issued stock, the stock that it buys is called treasury stock

What are the elements of equity?

- capital stock—split between preferred and common stock and the associated additional paid-in capital - retained earnings or deficit - accumulated other comprehensive income - treasury stock

Why might a corporation grant stock options to employees in lieu of a higher salary?

- stock options allow cash-poor companies to compete for higher priced talent in the employee market - stock options are believed to better align the incentives of the employee with those of the stockholders

On May 1, MC issued 100,000 shares and sold them to its founders. On October 15, 2013, MC repurchased 20,000 shares. After that, how many shares were issued and outstanding respectively?

100,000 & 80,000