VI. SOURCES OF CORPORATE FINANCE
1 Common Stock
Some definitions
treasury stock
The shares which is bought back by the issuing company (reducing the amount of outstanding stocks on the open market)
held in the company’s treasury.
issued and outstanding shares
The shares held by investors.
authorized share capital
The maximum number of shares that can be issued (without getting the approval of the current shareholders)
The share's par value
The price at which each share is recorded
additional paid-in capital or capital surplus
The difference between the price at which new shares are sold to investors and the par value is entered into the company’s accounts
Book value versus Market value
Book value
is a backward-looking measure.
tells us how much capital the firm has raised from shareholders in the past.
The market value
is forward-looking;
depends on the future dividends that shareholders expect to receive.
Market value is usually greater than book value.
Partly, inflation has driven the value of many assets above what they originally cost.
Also, firms raise capital to invest in projects with present values that exceed initial cost.
These positive-NPV projects made the shareholders better off.
Market value can fall below book value.
projects do go awry
companies fall on hard times
Dividends
A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share - DPS).
It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Dividends are not considered to be a business expense, so companies are not allowed to deduct dividend payments when they calculate their taxable income.
