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CH 9] Business 101 9-5

Equity Capital—Stocks
Equity capital in a company are represented by the stock that it issues and the
stocks are the units of ownership. Two types of stock may be issued by a company:
common stock and preferred stock.

Common Stock
Common stock is the basic form of corporate ownership. The holders of common common stock
stock expect a return on their investment in a company, and this return may be in the Stock providing owners
form of dividend payments for profitable years and an increase in the market value of voting rights but only a
residual claim to company
their stock as they hold it. assets.
Figure 9.3 is a common stock certificate for CLEAN HARBORS. A Stock
certificate will include the name and address of the registered owner(s), the number of
shares the certificate represents, the state in which the firm is incorporated, and the
signatures of corporate officers.
As the owners of the company, it is the common stock holders who vote on who
will sit on the board of directors, whether or not the company will purchase another
company or sell off a poor performing division. As stock holders they will benefit
from the company’s success and risk their investment if the company fails. If the par value
company fails, they are paid last, after all creditors and preferred stock holders. Value printed on stock
Common stock is sold at market value with either a stated par or no‑par value. Par certificates of some
value is the value printed on the stock certificates of some companies. In some states, companies.

par value is used as the basis for paying state incorporation taxes. Par value is an
arbitrary value and may be $1 or even no-value. The total number of shares represent
the total ownership of a company and any one individual’s ownership is based on the
number of shares that they hold. The value of any stockholder’s shares will be
determined by the market value of their stock and the number of shares that they hold.
Market value of any stock is the price at which that stock is currently selling and market value
is easily determined by referring to the financial page of the daily newspaper. Market Price at which a security is
value of stock varies with the activities of the marketplace and how investors view currently selling.

their world.
A company never values its stock by market value, because it is too volatile and
does not comport to good accounting protocols. Companies report what is called the
book value of the stock, which represent equity. The book value of a stock is book value
Value of stock determined
calculated by subtracting the company's liabilities from its assets, less the value of any by subtracting liabilities from
preferred stock. Then this net figure is divided by the number of shares of common assets, minus the value of
stock. It represents Equity in the accounting equation. any preferred stock.

Book Value = ((Assets—Liabilities) — Preferred Stock) / Number of common Stock Shares

When a company wants to raise additional money through the sale of stock, they
will either split the stock or sell stock that the company has in reserve, or if issuing
new stock offer current stockholders an opportunity to purchase a proportionate share preemptive right
of new stock issues as their preemptive right. Preemptive right allows current Stockholders' right to
purchase a proportionate
stockholders to maintain their current proportional share of ownership within a amount of new issues.
company. Without a preemptive right, a stockholder owning eight percent of a
company's stock may find their ownership share of the company diluted to four
percent if the company decided to double the amount of stock.

Preferred Stock 9
The fact that it has preference over common stock in the payment of dividends and
any claim against the company assets gives this stock its name: preferred stock.
Preferred stock is similar to bonds in that regular cash payments to the bearer of preferred stock
Stock providing owners
the security are required. However, preferred stock has an advantage over bonds in preferential dividend
that missing a dividend payment does not constitute default, whereas missing a coupon payment and first claim to
payment on a bond places a firm in default. assets after debts are paid
The dividend on preferred stock is often fixed. It is typically based on some but seldom with voting
rights.
percentage of the par value, or face value of the preferred stock. For example, if Nestlé

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