{"id":813,"date":"2015-05-13T17:38:54","date_gmt":"2015-05-13T17:38:54","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&p=813"},"modified":"2015-06-02T17:05:13","modified_gmt":"2015-06-02T17:05:13","slug":"common-and-preferred-stockholders-rights","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-finaccounting\/chapter\/common-and-preferred-stockholders-rights\/","title":{"raw":"Common and Preferred Stock","rendered":"Common and Preferred Stock"},"content":{"raw":"
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All corporations have common stock.\u00a0 Common stock provides the following rights to shareholders:<\/p>\r\n\r\n

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  • sell or transfer any\u00a0of their shares<\/li>\r\n\t
  • buy additional newly issued shares in a proportion equal to the percentage of shares they already own (called the preemptive right<\/strong>),<\/strong><\/li>\r\n\t
  • receive a dividend when declared,<\/li>\r\n\t
  • receive a portion of any money left over after paying all debts in a liquidation, and<\/li>\r\n\t
  • one vote for every share of stock.<\/li>\r\n<\/ul>\r\n<\/div>\r\nIt is important to note that shareholders cannot take money out of the business whenever they want like owners could in a sole proprietorship or partnership.\u00a0 Shareholders receive earnings of the company in the form of dividends which must be declared by the board of directors.\r\n\r\nThere is some terminology we need to get familiar with for stock.\u00a0 These include:\r\n
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    • Authorized shares<\/strong>:\u00a0 Authorized share are the total number of shares we are allowed to sell as specified in the corporate charter.<\/li>\r\n\t
    • Issued shares:<\/strong>\u00a0 Issued shares are the total number of share we have given out to shareholders.<\/li>\r\n\t
    • Outstanding shares<\/strong>:\u00a0 Outstanding shares are the total number of shares currently held by shareholders.\u00a0 Issues and outstanding shares will be different if the company has treasury stock, which we will discuss later.<\/li>\r\n\t
    • Par value<\/strong>:\u00a0 Random value assigned to each share of stock in the corporate charter.<\/strong><\/li>\r\n\t
    • No par value:<\/strong>\u00a0 A par value was not assigned to each share of stock in the corporate charter.<\/li>\r\n\t
    • Stated value:<\/strong>\u00a0 No par value stock (meaning no value was assigned to stock in the charter) but the board of directors voted and determined a value for each share of stock.<\/li>\r\n\t
    • Market value<\/strong>:\u00a0 Current value of a share of stock as determined by the stock exchange.<\/li>\r\n<\/ul>\r\nAll corporations have common stock.\u00a0 Another type of stock some corporations may have is preferred stock<\/strong>.\u00a0 Preferred stock has the same rights and terminology associated with common stock with a few differences.\u00a0 Preferred stock is guaranteed a specific amount or rate of dividends each year when dividends are declared.\u00a0 Preferred stockholders may give up their right to vote.\r\n\r\nhttps:\/\/youtu.be\/oVVt6P2q-6c\r\n\r\nTypes of preferred stock<\/strong>\r\n

      When a corporation issues both preferred and common stock, the preferred stock may be:<\/p>\r\n\r\n

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      • Noncumulative preferred stock <\/strong>is preferred stock on which the right to receive a dividend expires whenever the dividend is not declared.\u00a0 This means that if the company does not declare dividends this year they do not have to pay preferred shareholders the guaranteed dividend amount.<\/li>\r\n\t
      • Cumulative preferred stock<\/strong>\u00a0is preferred stock for which the right to receive a basic dividend accumulates if the dividend is not paid. Companies must pay unpaid cumulative preferred dividends before paying any dividends on the common stock.\u00a0 This means if the company does not declare dividends this year, the amount owed from this year will rollover to next year.\u00a0 Preferred shareholders must receive all dividends owed before common shareholders can get a dividend.<\/li>\r\n\t
      • Convertible preferred stock<\/strong><\/span> is preferred stock that is convertible into common stock of the issuing corporation. Many preferred stocks do not carry this special feature; they are nonconvertible. Holders of convertible preferred stock shares may exchange them, at their option, for a certain number of shares of common stock of the same corporation.<\/li>\r\n\t
      • Callable preferred stock<\/span> <\/strong>means that the corporation can inform nonconvertible preferred stockholders that they must surrender their stock to the company. Also, convertible preferred stockholders must either surrender their stock or convert it to common shares.\u00a0 Most preferred stocks are callable at the option of the issuing corporation.\u00a0 Preferred shares are usually callable at par value plus a small premium of 3 or 4 % of the par value of the stock. This call premium<\/span><\/strong> is the difference between the amount at which a corporation calls its preferred stock for redemption and the par value of the\u00a0preferred stock.<\/li>\r\n<\/ul>\r\n

        Why would a corporation call in its preferred stock? Corporations call in preferred stock for many reasons: (1) the outstanding preferred stock may require a 12 per cent annual dividend at a time when the company can secure capital to retire the stock by issuing a new 8 per cent preferred stock; (2) the issuing company may have been sufficiently profitable to retire the preferred stock out of earnings; or (3) the company may wish to force conversion of its convertible preferred stock because the cash dividend on the equivalent common shares is less than the dividend on the preferred shares.<\/p>\r\n

        We will discuss how noncumulative and cumulative preferred stock affects cash dividends in the next unit.<\/p>\r\n\r\n<\/div>\r\nhttp:\/\/www.openassessments.com\/assessments\/1210\r\n\r\n<\/div>\r\n<\/div>","rendered":"

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        All corporations have common stock.\u00a0 Common stock provides the following rights to shareholders:<\/p>\n

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        • sell or transfer any\u00a0of their shares<\/li>\n
        • buy additional newly issued shares in a proportion equal to the percentage of shares they already own (called the preemptive right<\/strong>),<\/strong><\/li>\n
        • receive a dividend when declared,<\/li>\n
        • receive a portion of any money left over after paying all debts in a liquidation, and<\/li>\n
        • one vote for every share of stock.<\/li>\n<\/ul>\n<\/div>\n

          It is important to note that shareholders cannot take money out of the business whenever they want like owners could in a sole proprietorship or partnership.\u00a0 Shareholders receive earnings of the company in the form of dividends which must be declared by the board of directors.<\/p>\n

          There is some terminology we need to get familiar with for stock.\u00a0 These include:<\/p>\n

            \n
          • Authorized shares<\/strong>:\u00a0 Authorized share are the total number of shares we are allowed to sell as specified in the corporate charter.<\/li>\n
          • Issued shares:<\/strong>\u00a0 Issued shares are the total number of share we have given out to shareholders.<\/li>\n
          • Outstanding shares<\/strong>:\u00a0 Outstanding shares are the total number of shares currently held by shareholders.\u00a0 Issues and outstanding shares will be different if the company has treasury stock, which we will discuss later.<\/li>\n
          • Par value<\/strong>:\u00a0 Random value assigned to each share of stock in the corporate charter.<\/strong><\/li>\n
          • No par value:<\/strong>\u00a0 A par value was not assigned to each share of stock in the corporate charter.<\/li>\n
          • Stated value:<\/strong>\u00a0 No par value stock (meaning no value was assigned to stock in the charter) but the board of directors voted and determined a value for each share of stock.<\/li>\n
          • Market value<\/strong>:\u00a0 Current value of a share of stock as determined by the stock exchange.<\/li>\n<\/ul>\n

            All corporations have common stock.\u00a0 Another type of stock some corporations may have is preferred stock<\/strong>.\u00a0 Preferred stock has the same rights and terminology associated with common stock with a few differences.\u00a0 Preferred stock is guaranteed a specific amount or rate of dividends each year when dividends are declared.\u00a0 Preferred stockholders may give up their right to vote.<\/p>\n