corpo terms for dummies

8/20/2019 Corpo Terms for Dummies

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'Incorporation'

The process of legally declaring a corporate entity as separate from its owners. Incorporation has many

advantages for a business and its owners, including:

1) Protects the owner's assets against the company's liabilities2) Allows for easy transfer of ownership to another party

3) Achieves a lower tax rate than on personal income

4) Receives more lenient tax restrictions on loss carry forwards

5) Can raise capital through the sale of stock

Incorporation involves drafting an "Articles of Incorporation", which lists the primary purpose of the

business and its location, along with the number of shares and class of stock being issued, if any.

Incorporation will also involve state-specific registration information and fees.

'Retained Earnings'

Retained earnings is the percentage ofnet earnings not paid out asdividends, but retained by the

company to be reinvested in its core business, or to pay debt. It is recorded undershareholders' equity on

thebalance sheet.

The formula calculates retainedearnings by adding net income to (or subtracting any net losses from)

beginning retained earnings and subtracting any dividends paid to shareholders:

Retained Earnings (RE) = Beginning RE + Net Income - Dividends

Also known as the "retention ratio" or "retained surplus".

Corporate governance

Corporate governance broadly refers to the mechanisms, processes and relations by which corporations

are controlled and directed.[1] Governance structures and principles identify the distribution of rights and

responsibilities among different participants in the corporation (such as the board of directors, managers,

shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and

procedures for making decisions in corporate affairs.[] !orporate governance includes the processes

through which corporations" ob#ectives are set and pursued in the conte$t of the social, regulatory and

market environment. Governance mechanisms include monitoring the actions, policies, practices, anddecisions of corporations, their agents, and affected stakeholders. !orporate governance practices are

affected by attempts to align the interests of stakeholders.[%][&] 'nterest in the corporate governance

practices of modern corporations, particularly in relation to accountability, increased following the high

profile collapses of a number of large corporations during 1*, most of which involved accounting

fraud+ and then again after the recent financial crisis in .

Principles of Corporate Governance

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• Rights and equitable treatment of shareholders-[1][1][] /rgani0ations should respect the

rights of shareholders and help shareholders to e$ercise those rights. hey can help shareholders

e$ercise their rights by openly and effectively communicating information and by encouraging

shareholders to participate in general meetings.

• Interests of other stakeholders-[1] /rgani0ations should recogni0e that they have legal,

contractual, social, and market driven obligations to nonshareholder stakeholders, including

employees, investors, creditors, suppliers, local communities, customers, and policy makers.

• Role and responsibilities of the board-[][%] he board needs sufficient relevant skills and

understanding to review and challenge management performance. 't also needs ade2uate si0e and

appropriate levels of independence and commitment.

• Integrity and ethical behavior -[&][3] 'ntegrity should be a fundamental re2uirement in choosing

corporate officers and board members. /rgani0ations should develop a code of conduct for their

directors and e$ecutives that promotes ethical and responsible decision making.

• Disclosure and transparency-[4][5] /rgani0ations should clarify and make publicly known the

roles and responsibilities of board and management to provide stakeholders with a level of

accountability. hey should also implement procedures to independently verify and safeguard the

integrity of the company"s financial reporting. 6isclosure of material matters concerning the

organi0ation should be timely and balanced to ensure that all investors have access to clear, factual

information.

Types of Capitalization

The study of capitalisation involves an analysis of three aspects:

i) amount of capital

ii) composition or form of capital

iii) changes in capitalisation.

Capitalisation may be of 3 types. They are over capitalisation, under capitalisation

and fair capitalisation. Among these three over capitalisation is likely to be offrequent occurrence and practical interest.

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Over Capitalisation:

7any have confused the term 8overcapitalisation9 with abundance of capital and 8undercapitalisation9

with shortage of capital. 't becomes necessary to discuss these terms in detail. :n enterprise becomes

overcapitalised when its earning capacity does not #ustify the amount of capitalisation.

/vercapitalisation has nothing to do with redundance of capital in an enterprise. /n the other hand, there

is a greater possibility that the overcapitalised concern will be short of capital. he abstract reasoning

can be e$plained by applying certain ob#ective tests. hese tests re2uire the comparison between the

different values of the e2uity shares in a corporation. ;hen we speak in terms of overcapitalisation we

always have the interest of e2uity holders in mind.

There are various standards of valuing corporation or its equity shares:

Par value:

't is not the face value of a share at which it is normally issued, i.e., at premium nor at discount, it is static

and not affected by business oscillations. hus it fails to reflect the various business changes.

arket !alue:

't is determined by factors of demand and supply in a stock market. 't is dependent on a number of

considerations, affecting demand as well as supply side.

"ook !alue:

't is calculated by dividing the aggregate of the proprietary items * like share capital, surplus and

proprietary reserves * by the number of outstanding shares.

Real !alue:


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't is found out by dividing the capitalised value of earnings by the number of outstanding shares.


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he promotion of a company may entail the conversion of a partnership firm or a private company into a

public limited company and the transfer of assets may be at inflated prices which do not bear any relation

to the earning capacity of the concern. Dnder these circumstances, the book value of the corporation will

be more than its real value.

ii) he incurring of high establishment or promotion e$penses (e$- good will, patent rights) is a potent

cause of overcapitalisation. 'f the earnings later on do not #ustify the amount of capital employed, the

company will be overcapitalised.

iii& Inflationary conditions:


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'f corporations follow liberal dividend policy by neglecting essential provisions, they discover themselves

to be overcapitali0ed after a few years when book value of their shares will be higher than the real valueF

vii& Ta)ation Policy:

/vercapitalisation of an enterprise may also be caused due to e$cessive ta$ation by the Government

and also their basis of calculation may leave the corporations with meagre funds.

Effects of over capitalisation:

/vercapitalisation affects the company, the shareholders and the society as a whole. he confidence of

'nvestors in an overcapitalised company is in#ured on account of its reduced earning capacity and the

market price of the shares which falls conse2uently. he creditstanding of a corporation is relatively poor.

!onse2uently, the creditstanding of a corporation is relatively poor. !onse2uently, the company may be

forced to incur unwieldy debts and bear the heavy loss of its goodwill 'n a subse2uent reorgani0ation. he

=hareholders bear the brunt of over capitali0ation doubly. ot only is their capital depreciated but the

income is also uncertain and mostly irregular. heir holdings have little value as collateral security.

:n overcapitalised company tries to increase the prices and reduce the 2uality of products, and as a

result such a company may li2uidate. 'n that case the creditors and the Habourers will be affected. hus it

leads to the misapplication and wastage of the resources of society.

Corrections for over-capitalisation:

*vercapitalization can be rectified if the follo$ing steps are taken:

1. >eorganisation of the company by selling shares at a high rate of discount.

. 'ssuing less interested new debentures on premium in place of old debentures.

%. >edeeming preference shares carrying high dividend


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&. >educing the face value (par value) of shares.

Under-Capitalisation:

Generally, undercapitalisation is regarded e2uivalent to the inade2uacy of capital but it should be

considered as the reverse of overcapitalisation i.e. it is a condition when the real value of the corporation

is more than the book value.

The follo$ing are the causes for under%capitalization:

1. Underestimation of earnings:

=ometimes while drafting the financial plan, the earnings are anticipated at a lower figure and the

capitalisation may be based on that estimate+ if the earnings prove to be higher the concern shall become

undercapitalised.

2. Unforeseeable increase in earnings:

7any corporations started during depression find themselves to be undercapitalised in the period of

recovery or boom due to unforeseeable increase in earnings.

3. Conservative dividend policy:


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4. High efficienc maintained:


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in market downturns) in stock price, which results in lower overall returns. One advantage of preferred

stock is that in the event of bankruptcy, preferred shareholders are paid off before the common

shareholder (but still after debt holders).

I like to think of preferred stock as being somewhere in between bonds and common stock. It sharessimilarities with both. As a result, I wouldn’t hold preferred stock. I don’t really see any reason to forego

the growth potential of common stock, or the additional safety provided by bonds. For me, it’s a hybrid that

doesn’t belong in my portfolio.

+hat are the different types of stocks,here are t$o main types of stocks- common stock and preferred stock. !ommon stock is, well,common. ;hen people talk about stocks they are usually referring to this type. 'n fact, the ma#orityof stock is issued is in this form.

Do common stocks pay dividends,/ne way profit is distributed to the shareholders is through dividends, which are often paid in cash fromthe company"s earnings. Dividends are usually paid on a 2uarterly basis. Common stockholders neverknow the value of their dividends in advance, while preferred stockholders receivedividends at a fi$edrate.

+hat are stocks and shares,Ilain and simple, stock is a share in the ownership of a company. =tock represents a claim onthe company-s assets and earnings. :s you ac2uire more stock, your ownership stake inthe company becomes greater. ;hether you say shares, e2uity, or stock, it all means the same thing

+hat is the meaning of corporate stock,

he stock (also capital stock) of a corporation constitutes the e2uity stake of its owners. 't representsthe residual assets of the company that would be due to stockholders after discharge of all senior claimssuch as secured and unsecured debt

+atered stock is an asset with an artificiallyinflated value. he term is most commonly used to refer to a

form of securities fraud common under older corporate laws that placed a heavy emphasis upon the par

value of stock.

;hat is a Ireferred =tockF6JA'''/ of "Preferred 'tock" : class of ownership in a corporation that has a higher claim on theassets and earnings than common stock. Preferred stock generally has a dividend that must be paid outbefore dividends to common stockholders and the shares usually do not have voting rights

+hat is a preference share,!ompany stock with dividends that are paid to shareholders before common stock dividends are paid out.'n the event of a company bankruptcy, preferred stock shareholders have a right to be paid companyassets first. Preference shares typically pay a fi$ed dividend, whereas common stocks do not

Do preference shares have voting rights,


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Preferred stock generally has a dividend that must be paid out before dividends to common stockholdersand the shares usually do not have voting rights. he precise details as to the structureof preferred stock is specific to each corporation.

Types

'n addition to straight preferred stock, there is diversity in the preferred stock market. :dditional types of

preferred stock include-

• Prior preferred stock K7any companies have different issues of preferred stock outstanding at

one time+ one issue is usually designated highestpriority. 'f the company has only enough money to

meet the dividend schedule on one of the preferred issues, it makes the payments on the prior

preferred. herefore, prior preferreds have less credit risk than other preferred stocks (but usually

offers a lower yield).

• Preference preferred stock K>anked behind a company"s prior preferred stock (on a seniority

basis) are its preference preferred issues. hese issues receive preference over all other classes of

the company"s preferred (e$cept for prior preferred). 'f the company issues more than one issue of

preference preferred, the issues are ranked by seniority. /ne issue is designated first preference, the

ne$tsenior issue is the second and so on.

• Convertible preferred stock Khese are preferred issues which holders can e$change for a

predetermined number of the company"s commonstock shares. his e$change may occur at any

time the investor chooses, regardless of the market price of the common stock. 't is a oneway deal+

one cannot convert the common stock back to preferred stock. : variant of this is the anti-dilutive

convertible preferred recently made popular by investment banker =tan 7edley who structured

several variants of these preferred for some forty plus public companies. 'n the variants used by =tan

7edley the preferred share converts to either a percentage of the company"s common shares or a

fi$ed dollar amount of common shares rather than a set number of shares of common. [5] he intention

is to ameliorate the bad effects investors suffer from rampant shorting and dilutive efforts on

the /! markets.

• Cumulative preferred stock K'f the dividend is not paid, it will accumulate for future payment.

• Exchangeable preferred stock Khis type of preferred stock carries an embedded option to be

e$changed for some other security.

• Participating preferred stock Khese preferred issues offer holders the opportunity to receive

e$tra dividends if the company achieves predetermined financial goals. 'nvestors who purchased

these stocks receive their regular dividend regardless of company performance (assuming the

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company does well enough to make its annual dividend payments). 'f the company achieves

predetermined sales, earnings or profitability goals, the investors receive an additional dividend.

• Perpetual preferred stock Khis type of preferred stock has no fi$ed date on which invested

capital will be returned to the shareholder (although there are redemption privileges held by thecorporation)+ most preferred stock is issued without a redemption date.

• Putable preferred stock Khese issues have a LputL privilege, whereby the holder may (under

certain conditions) force the issuer to redeem shares.

• Monthly income preferred stock K: combination of preferred stock and subordinated debt.

• Non-cumulative preferred stock K6ividends for this type of preferred stock will not accumulate if

they are unpaid+ very common in >uI= and bank preferred stock, since under


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example, if a stock was trading at $5 per share and the par value on the stock was $10, theoretically, the

company would have a $5-per-share liability.

Par value has no relation to the market value of a stock. A no par value stock can still trade for tens or

hundreds of dollars - it all depends on what the market feels the company is worth.

Par Value for Stock

Par value is the price at which a company's shares were initially offered for sale. The intent

behind the par value concept was that prospective investors could be assured that an

issuing company would not issue shares at a price below the par value.

DEFINITION of 'Par Value'

Theface value of a bond. Par value for a share refers to the stock value stated in thecorporate charter.

Par value is important for a bond orfixed-income instrument because it determines its maturity value aswell as the dollar value ofcoupon payments. Par value for a bond is typically $1,000 or $100. Shares

usually have no par value or very low par value, such as 1 cent per share. Themarket price of a bond

may be above or below par, depending on factors such as the level of interest rates and the bond’s credit

status. In the case ofequity, par value has very little relation to the shares' market price.

;hat is no par value stockF

No par value stock is shares that have been issued without a par value listed on the face of

the stock certificate. Historically, par value used to be the price at which a company initially

sold its shares. There is a theoretical liability by a company to its shareholders if the market

price of its stock falls below the par value for the difference between the market price of the

stock and the par value

Companies set the par value as low as possible in order to avoid this theoretical liability. t is

common to see par values set at !"."# per share, which is the smallest unit of currency.

$ome states allow companies to issue shares with no par value at all, which eliminates the

theoretical liability payable by the issuer to shareholders. f common stock has no par value,

a company prints %no par value% on the face of any stock certificates that it issues.

&hen a company has no par value stock, there is effectively no minimum baseline from

which to price the stock, so the price is instead determined by the amount that investors are

willing to pay, based on their perceived value of the issuing entity this may be based on a

number of factors, such as cash flows, the competitiveness of the industry, and changes in

technology.

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&hen a company sells no par value stock to investors, it debits cash received, and credits

the common stock account. f a company had instead sold common stock to investors that

had a par value, then it would credit the common stock account up to the amount of the par

value of the shares sold, and it would credit the additional paid(in capital account in the

amount of any additional price paid by investors in e)cess of the par value of the stock.

DEFINITION of 'Voting Shares'

Shares that give the stockholder the right to vote on matters of corporate policy making as well as who will

compose the members of theboard of directors.

If I own a stock in a company, do I get a say in the company's operations?

You don't get a direct say in a company's day-to-day operations, but, depending on whether you

ownvoting or non-voting stock, you may have a hand in shaping itsboard of directors and deciding on

special issues.

Voting Stock– If the stock you own is a voting stock and you're ashareholder on record when a decision

must be made through a vote, you have a right to vote on the issue. The right to vote for a member on the

board of directors or on a specific business decision is similar to the right to vote for a U.S. senator or on a

political issue in a plebiscite: you don't have to vote if you don't want to, and you don't really get a direct

say in daily government operations (although you do vote on the people that do). The one main difference

between voting as a citizen and voting as a shareholder is that if, as a shareholder, you choose not to

submit your vote, there is the possibility that a default choice will be made regardless of your true desires.

Be sure carefully to read the fine print on theproxy form sent to you.

Non-Voting Stock – A non-voting stock doesn't allow you to participate in votes affecting shareholders

and the company. These types of shares are created so that investors who forfeit the right to have a say in

the direction of the company are able to participate in the company's profitability and success.

Not all companies offer these two different types of stock, and not all types of voting stock have the same

voting rights. If you are interested in playing a part (albeit a very small one) in the decision making

processes of a company, make sure you buy the right type of stock.

Founders' shares

ssued to the originators of a firm, these shares *stock+ normally donot receive any return until dividend payable to common stock holders *ordinary

share holders+ is paid out. However, these shares are entitled to all of the remaining

*after ta)+ profits, no matter how much.

Redeemable shares.

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hese are shares issued on terms that the company will, or may, buy them back at some future date. he

date may be fi$ed (e.g. that the shares will be redeemed five years after they are issued) or at the

directors" discretion. he redemption price is often the same as the issue price, but need not be. This can

be a way of making a clear arrangement with an outside investor.

They may also be redeemable at any time at the company's option. This often done with non-voting

shares given to employees so that, if the employee leaves the company his shares can be taken back at

their nominal value. There are statutory restrictions on the redemption of shares. The main

requirement,like a buy-back, being that the company may only redeem the shares out of accumulated

profits or the proceeds of a fresh issue of shares (unless it makes a permissible

capital. Preference shares are often redeemable

What is treasury stock?

Treasury stock is a corporation's previously issued shares of stock hich have been

repurchased from the stockholders and the corporation has not retired the repurchased

shares. The number of shares of treasury stock !or treasury shares) is the di"erence

beteen the number of shares issued and the number of sharesoutstanding. #ince the

treasury shares result in feer shares outstanding, there may be a slight increase in the

corporation's earnings per share.

Treasury #tock is also the title of a general ledger account that ill typically have a debit

balance equal to the cost of the repurchased shares being held by the corporation. !#ome

corporations use the par value method instead.) The cost of the treasury stock purchased

ith cash ill reduce the corporation's cash and the amount of its total stockholders' equity.

The shares of treasury stock ill not receive dividends, ill not have voting rights, and

cannot result in an income statement gain or loss. The shares of treasury stock can be sold,

retired, or could continue to be held as treasury stock.
http://www.companylawclub.co.uk/can-a-company-buy-its-own-shareshttp://www.companylawclub.co.uk/can-a-company-buy-its-own-shareshttp://www.companylawclub.co.uk/classes-of-shares#prefhttp://www.companylawclub.co.uk/classes-of-shares#prefhttp://www.accountingcoach.com/blog/earnings-per-share-epshttp://www.accountingcoach.com/blog/what-is-a-general-ledger-accounthttp://www.accountingcoach.com/blog/what-is-a-debit-balancehttp://www.accountingcoach.com/blog/what-is-a-debit-balancehttp://www.companylawclub.co.uk/can-a-company-buy-its-own-shareshttp://www.companylawclub.co.uk/classes-of-shares#prefhttp://www.accountingcoach.com/blog/earnings-per-share-epshttp://www.accountingcoach.com/blog/what-is-a-general-ledger-accounthttp://www.accountingcoach.com/blog/what-is-a-debit-balancehttp://www.accountingcoach.com/blog/what-is-a-debit-balance

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