CHAPTER XIII

REPORTERS: JUAN, ANNA MARIE E. LAPAT, MAITHA ANGELA

Stocks

owned capital of the business.

considered as a permanent investment.

Stockholders

people who invest in stocks; and their ownership is evidenced by a

STOCK CERTIFICATE.

Stock Financing

refers to the procurement of corporate funds through the

sale of shares of stocks to prospective investors.

It is a method of financing by increasing the equity capital.

Authorized Capital Stock the total amount of stocks of all classes authorized in the certificate of incorporation.
Issued Stocks Un-issued Stocks

Capital Stock represents the actual amount of stocks of all classes which are issued and outstanding at any time.

Capital
Accountant View: The total ownership of the business

which is obtained by deducting the total liabilities from the total assets. Business people View: All assets of the business regardless of where it came from whether equity or borrowed money. Economist View: All productive assets used in the business excluding non-productive assets.

CAPITALIZATION refers to the sum of the face or par value of all outstanding stocks and bonds issued by the corporation. Computed by adding all bonded indebtedness issued by the corporation to the capital stock.

Example No. 1

A corporation issued 200,000 shares of common stocks and 100,000 shares of preferred stocks both having a par value of P100.00 each share. The corporation sold 150,000 shares of common stocks and 100,000 shares of preferred stocks at par. It also had a bond issue of 50,000 bonds having a face value of P1000.00 per bond. The corporation borrowed from the bank P 100,000,000.00 to augment its funds. Its books show a surplus of P20,000.00. What are the companys authorized capital stock, capital stock, capital, and capitalization?

Authorized Capital Stock: Common Stocks (200,000 x 100) Preferred Stocks (100,000 x 100) Authorized Capital Stock Capital Stock: Common Stocks (150,000 x 100) Preferred Stocks (100,000 x 100) Capital Stock

P 200,000,000 100,000,000 P 300,000,000

P 150,000,000 100,000,000 P 250,000,000

CAPITALIZATION: Capital Stock Bonds (50,000 x 1,000) CAPITAL Capital Stock Borrowed Funds Total Capital

P 250,000,000 50,000,000 P 300,000,000

P 250,000,000 100,000,000 P 350,000,000

Un-issued Stocks A portion of the authorized capital stock which have not yet been subscribed and remains in the corporation. Issued Capital Stock Refers to the stock already issued and outstanding. Outstanding Stocks Refers to all issued and subscribed stocks which may be fully paid or partly paid which are held by stockholder other than the issuing corporation.

Un-issued stocks Common Stocks (200,000- 150,000= 50,000*100) P 50,000,000 Issued Stocks Common Stocks (150,000*100) Preferred Stocks (100,000*100)

P 150,000,000 100,000,000 P 250,000,000 P250,000,000

Outstanding Stocks

Refers to those stocks issued and fully paid but reacquired by the issuing corporation.

Reacquisition may be through: Purchase Gift Donation

A resolution passed by the board of directors to demand payment for the unpaid subscription.

REQUIREMENTS: 1. A board resolution must be made specifying the percentage of the unpaid balance due when and where and to whom payment should b made. 2. The resolution must specify the date of delinquency which shall not be less than 30 days or more than 60 days from the date of call. 3. A notice of a call for payment must be sent to the stockholders.

The highest bidder is awarded the sale.

HIGHEST BIDDER the buyer who is willing to pay the unpaid subscription

including interest accruing thereon and the cost of publication and other incidental expenses incurred in sale.

1. 2. 3.

Defect or irregularity in the call for unpaid subscription. Defect or irregularity in the notice of delinquency. Defect or irregularity in the sale.

Major Classifications of Stocks: 1. Common Stocks 2. Preferred Stocks Common Stocks Simplest form of ownership in corporation. It has the fundamental rights of the stockholder without any privilege. Preferred Stocks Stocks with privileges and preferences aside from the fundamental rights.

Preferred as to Dividends Stocks entitled to receive dividend of the corporation first before the other stockholders of the corporation are paid their share. Preferred as to Assets Stocks which share in the distribution of the proceeds from the sale of corporate assets before the common stockholders received their share.

1.

2.

3.
4.

First receiver of dividends before all other stockholders. On the point of view of the corporation, the advantage of issuing preferred stocks compared to issuance of bonds is that dividend may not be declared in the event that the BOD believe that the corporation needs the income for expansion. In bonds, interest is a fixed obligation. The issuance of this stock increases the firms financial leverage. In case of mergers, it can be exchanged for common stocks of the acquired company.

1.

Compare to bonds, preferred stocks are costlier for the corporation. It is also costly for the corporation because dividends are paid from the after tax earnings while interests paid to long term debt are tax-deductible.

2.

PARTICIPATING and NON- PARTICIPATING PREFERRED STOCKS

Participating Stocks Stocks which still participate with the common stock even after they have receive their preferential rate.
Non-participating Stocks Stocks entitled only to their preferential rate.

Kinds of Participating Preferred Stocks

1. Full Participation- refers to those preferred stocks that still participate with the common stocks after the common stocks have received the same preferential rates as those given to the preferred stocks. Example: Say a corporation issues 20,00 shares of common stocks with a par value of P100.00 per share and participating preferred stocks of 4,00 shares with a par value of P200.00 per share. They declare dividends worth P200,000. Preferential rate is .06 per share.

Dividends Participating Preferred Stocks (4,000 x 200= 800,000 x .06) Common Stocks (20,000 x 100= 2,000,000 x .06)

P 200,000

P 48, 000
120,000 (168,000) P 32,000

Share of Participating PS (800,000/2,800,000*32,000= 9,142.86+48,000) 57, 142.86 Share of CS (2,000,000/2,800,000*32,000= 22,857.14+ 120,000) 142,857.14

CUMULATIVE and NON-CUMULATIVE STOCKS Cumulative Stocks- entitled to dividends even when dividends are not declared.

Non-cumulative Stocks- stocks entitled to dividends only when declared.

CALLABLE AND REDEEMABLE STOCKS

Callable Stocks- stocks that can be redeemed by the issuing company before their maturity date.
TWO KINDS: 1. Mandatory type of Callable Stocks- requires the corporation to redeem the stocks with a specific period. 2. Optional type of Callable Stocks- does not require the corporation to redeem the stock. Sinking Fund- an amount set aside from the earnings of the corporation specifically earmarked for the redemption of stocks.

CONVERTIBLE STOCKS stocks that can be exchanged to other securities of the corporation either for another class of stocks or bonds at a specified ratio.

Conversion Ratio- the rate at which a stock is exchanged with other stocks or bonds of the corporation.

ADVANTAGES OF CONVERTIBLE BONDS 1. It increases the stability of the stocks. 2. It is also a protection to the stockholder against dilution of the shares of the stocks of the corporation.

PAR VALUE and NO PAR STOCKS Par Value Stock- one that has an assigned value on its face. Par Value- minimum amount that the corporation should accept for the payment of the stocks.

No par value Stock- stocks without any designated price on its face.

PAR VALUE and NO PAR VALUE STOCKS

RESTRICTIONS IN THE ISSUANCE OF NO PAR VALUE STOCKS: 1. 2. 3. 4. No par value stocks may be sold less than P5.00 No par value stocks may be issued which are preferred as to assets. Cannot be sold on installment basis. Banks, trust companies, insurance companies, and building and loan associations may not issue no-par value stocks. 5. Cannot be issued without prior approval of the public service commission.

Guaranteed Stocks- stocks whose dividend payments are assured by the corporation other than the issuing corporation. Deferred Stocks- stocks whose dividend are postponed for a time in the future and that is subject to the lapse of a period of time or the occurrence of a particular event which allow the corporation to declare dividends.

 Stock Purchase Warrants- an instrument given to stockholders giving

him an option to buy shares of stocks from the company within the specific period of time at a stipulated price. FOUNDERs SHARES- stocks given to the incorporators of the firm.

PROMOTERs SHARES- stocks used for compensating promoters for the services they rendered in promoting the corporation.

corporate profits or earnings set aside by BOD to be distributed to stockholders in proportion to their stock holdings.

KINDS: 1. Cash Dividends 2. Stock Dividends 3. Property Dividends 4. Scrip Dividends 5. Liquidating Dividends

CASH DIVIDENDS- distributed by the corporation when it has enough cash to declare as dividends. REQUIREMENTS: 1. There must be an income. 2. There must be enough cash to be given out as dividends. 3. The dividends are declared by the Board of Directors 4. Notice are sent to the stockholders.

STOCK DIVIDENDS- arise when the BOD decides to expand business operation. REQUIREMENTS: 1. There must be a corporate profit. 2. The profit must be declared by the Board of Directors in stocks. 3. The stock dividend must be approved by 2/3 of the outstanding stock in meeting called for the purpose. 4. A notice must be sent to the stockholders.

PROPERTY DIVIDEND- dividend given at the discretion of the board of directors in the form of properties of the corporation. SCRIP DIVIDEND- a written certificate issued by the corporation to its stockholders entitling them to the payment of cash at some future designated date.

LIQUIDATING DIVIDEND- dividends arising from the winding up of a corporation.