Stockholders' Equity: Classes of Capital Stock

Read this chapter, which details stockholders' equity, specifically capital stock. You learn about the different classes of stock, their characteristics, how capital appears on the Statement of Stockholders' Equity, and the steps for issuing stock to the public.

The corporation

Other values commonly associated with capital stock

Market value is the price of shares of capital stock bought and sold by investors in the market; it is the value of greatest interest to investors. Market price is directly affected by (1) all the factors that influence general economic conditions, (2) investors' expectations concerning the corporation, and (3) the corporation's earnings.

Book value per share is the amount per share that 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. A later section discusses book value per share in greater detail.

Liquidation value is the amount a stockholder would receive if a corporation discontinued operations and liquidated by selling its assets, paying its liabilities, and distributing the remaining cash among the stockholders. Since the assets might be sold for more or less than the amounts at which they are recorded in the corporation's accounts, liquidation value may be more or less than book value. If only one class of capital stock is outstanding, each stockholder would receive, per share, the amount obtained by dividing the remaining cash by the number of outstanding shares. If two or more classes of stock are outstanding, liquidation value depends on the rights of the various classes.

A corporation issues certain capital stock with the stipulation that it has the right to redeem it. Redemption value is the price per share at which a corporation may call in (or redeem) its capital stock for retirement.