Stockholders' Equity: Classes of Capital Stock

Key Terms

Articles of incorporation The application for the corporation's charter.

Board of directors Elected by the stockholders to have primary responsibility for formulating policies for the corporation. The board also authorizes contracts, declares dividends, establishes executive salaries, and grants authorization to borrow money.

Book value per share Stockholders' equity per share; the amount per share each stockholder would receive if the corporation were liquidated without incurring any further expenses and if assets were sold and liabilities liquidated at their recorded amounts.

Bylaws A set of rules or regulations adopted by the board of directors of a corporation to govern the conduct of corporate affairs. The bylaws must be in agreement with the laws of the state and the policies and purposes in the corporate charter.

Callable preferred stock If the stock is nonconvertible, it must be surrendered to the company when the holder is requested to do so. If the stock is convertible, it may be either surrendered or converted into common shares when called.

Call premium (on preferred stock) The difference between the amount at which a corporation calls its preferred stock for redemption and the par value of the stock.

Capital stock Transferable units of ownership in a corporation.

Capital stock authorized The number of shares of stock that a corporation is entitled to issue as designated in its charter.

Capital stock issued The number of shares of stock that have been sold and issued to stockholders.

Capital stock outstanding The number of shares of authorized stock issued and currently held by stockholders.

Common stock Shares of stock representing the residual equity in the corporation. If only one class of stock is issued, it is known as common stock. All other claims rank ahead of common stockholders' claims.

Convertible preferred stock Preferred stock that is convertible into common stock of the issuing corporation.

Corporate charter The contract between the state and the incorporators of a corporation, and their successors, granting the corporation its legal existence.

Corporation An entity recognized by law as possessing an existence separate and distinct from its owners; that is, it is a separate legal entity. A corporation is granted many of the rights, and placed under many of the obligations, of a natural person. In any given state, all corporations organized under the laws of that state are domestic corporations; all others are foreign corporations.

Cumulative preferred stock Preferred stock for which the right to receive a basic dividend accumulates if any dividends have not been paid; unpaid cumulative preferred dividends must be paid before any dividends can be paid on the common stock.

Discount on capital stock The amount by which the par value of shares issued exceeds their issue price. The original issuance of shares at a discount is illegal in most states.

Dividend A distribution of assets (usually cash) that represents a withdrawal of earnings by the owners.

Dividend on preferred stock The amount paid to preferred stockholders as a return for the use of their money; usually a fixed or stated amount expressed in dollars per share or as a percentage of par value per share.

Dividends in arrears Cumulative unpaid dividends, including quarterly dividends not declared for the current year.

Domestic corporation See corporation.

Foreign corporation See corporation.

Incorporators Persons seeking to bring a corporation into existence.

Legal capital (stated capital) An amount prescribed by law (usually the par value or stated value of shares issued) below which a corporation may not reduce stockholders' equity through the declaration of dividends or other payments to stockholders.

Liquidation value The amount a stockholder will receive if a corporation discontinues operations and liquidates by selling its assets, paying its liabilities, and distributing the remaining cash among the stockholders.

Market value The price at which shares of capital stock are bought and sold in the market.

Minutes book The record book in which actions taken at stockholders' and board of directors' meetings are recorded; the written authorization for many actions taken by corporate officers.

Noncumulative preferred stock Preferred stock on which the right to receive a dividend expires if the dividend is not declared.

No-par stock Capital stock without par value, to which a stated value may or may not be assigned.

Organization costs Costs of organizing a corporation, such as incorporation fees and legal fees applicable to incorporation.

Paid-in capital Amount of stockholders' equity that normally results from the cash or other assets invested by owners; it may also result from services provided for shares of stock and certain other transactions.

Paid-in capital in excess of par (or stated) value – common or preferred Capital contributed to a corporation in addition to that assigned to the shares issued and recorded in capital stock accounts.

Par value An arbitrary amount assigned to each share of a given class of stock and printed on the stock certificate.

Preemptive right The right of stockholders to buy additional shares in a proportion equal to the percentage of shares already owned.

Preferred stock Capital stock that carries certain features or rights not carried by common stock. Preferred stock may be preferred as to dividends, as to assets, or as to both dividends and assets. Preferred stock may be callable and/or convertible and may be cumulative or noncumulative.

Proxy A legal document signed by a stockholder, giving another person the authority to vote the stockholder's shares at a stockholders' meeting.

Redemption value The price per share at which a corporation may call in (or redeem) its capital stock for retirement.

Retained earnings The part of stockholders' equity resulting from net income, reduced by dividends and net losses.

Return on average common stockholders' equity A measure of the income-producing ability of the company. It is the ratio of net income available to common stockholders divided by average common stockholders' equity.

Shares of stock Units of ownership in a corporation.

Stated value An arbitrary amount assigned by the board of directors to each share of a given class of no-par stock.

Stock certificate A printed or engraved document serving as evidence that the holder owns a certain number of shares of capital stock.

Stockholders' ledger Contains a group of subsidiary accounts showing the number of shares of stock currently held by each stockholder.

Stock preferred as to assets Means that in liquidation, the preferred stockholders are entitled to receive the par value (or a larger stipulated liquidation value) per share before any assets may be distributed to common stockholders.

Stock preferred as to dividends Means that the preferred stockholders are entitled to receive a specified dividend per share before any dividend on common stock is paid.

Stock registrar Typically, a bank that maintains records of the shares outstanding for a company.

Stock-transfer agent Typically, a bank or trust company employed by a corporation to transfer stock between buyers and sellers.

Stock without par value See no-par stock.

Unissued shares Capital stock authorized but not yet issued.