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.

Analyzing and using the financial results – Return on average common stockholders' equity

Understanding the learning objectives

  • Advantages:

(a) Easy transfer of ownership.
(b) Limited liability.
(c) Continuous existence of the entity.
(d) Easy capital generation.
(e) Professional management.
(f) Separation of owners and entity.

  • Disadvantages:

(a) Double taxation.
(b) Government regulation.
(c) Entrenched, inefficient management.
(d) Limited ability to raise creditor capital.

  • Par value – an arbitrary amount assigned to each share of a given class of stock and printed on the stock certificate.
  • Stated value – an arbitrary amount assigned by the board of directors to each share of a given class of no-par stock.
  • Market value – the price at which shares of capital stock are bought and sold in the market.
  • Book value – 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.
  • Liquidation value – the amount a stockholder would receive if a corporation discontinues operations, pays its liabilities, and distributes the remaining cash among the stockholders.
  • Redemption value – the price per share at which a corporation may call in (redeem) its capital stock for retirement.
  • 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 authorized shares of stock that have been issued and that are still currently held by stockholders.
  • Two basic classes of capital stock:

    • (a) Common stock – represents the residual equity.
    (b) Preferred stock – may be preferred as to dividends and/or assets. Also may be cumulative and/or callable.

  • If the company has paid-in capital in excess of par value, the proper form would be:
Stockholders' equity:
Paid-in capital:
Preferred stock – $100 par value, 6% cumulative; 1,000 shares authorized, issued, and outstanding $ 100,000
Common stock – without par value, stated value, $5; 100,000 shares authorized,80,000 shares; issued and outstanding 400,000 $ 500,000
Paid-in capital in excess of par (or stated)value:
From preferred stock issuances $ 5,000
From common stock issuances 20,000 25,000
Total paid-in capital $ 525,000
Retained earnings 200,000
Total stockholders' equity $ 725,000


The following examples illustrate the issuance for cash of: (1) stock with a par value, (2) no-par value stock with a stated value, and (3) no-par value stock without a stated value.

  • Issuance of par value stock for cash – 10,000 shares of USD 20 par value common stock issued for USD 22 per share.
Cash (+A) 220,000
Common Stock (+SE) 200,000
Paid-In Capital in Excess of Par Value – Common (+SE) 20,000


  • Issuance of no-par, stated value stock for cash – 10,000 shares (no-par value) with USD 20 per share stated value issued for USD 22 per share.
Cash (+A) 220,000
Common Stock (+SE) 200,000
Paid-In Capital in Excess of Stated Value – Common (+SE) 20,000


  • Issuance of no-par stock without a stated value for cash – 10,000 shares (no-par value) issued at USD 22 per share.
Cash (+A) 220,000
Common Stock (+SE) 220,000


  • Example: A corporation has 200,000 shares of common stock and 5,000 shares of preferred stock outstanding. Preferred stock is 6 percent and cumulative. It is preferred as to dividends and as to assets in liquidation to the extent of the liquidation value of USD 100 per share, plus any cumulative dividends on the preferred stock. Dividends for three years are unpaid. Total stockholders' equity is USD 4,100,000. Calculations are as follows:
Total Per Share
Total stockholders' equity
$4,100,000
Book value of preferred stock (5,000 shares) $ 500,000
Liquidation value (5,000 shares X $100) 90,000 590,000 $ 118.00
Dividends (3 years at $30,000) $3,510,000 17.55
Book value of common stock (200,000 shares)


  • The return on average common stockholders' equity equals net income available to common stockholders divided by average common stockholders' equity.
  • The return on average common stockholders' equity is an important measure of the income-producing ability of the company.