Question

1. What is the meaning of each of the following terms: corporation, articles of incorporation, corporate

charter, board of directors, corporate officers, and organization costs?

2. What is meant by the limited liability of a stockholder? Does this characteristic enhance or reduce a corpo-

ration’s ability to raise capital?

3. Contrast the federal income taxation of a corporation with that of a sole proprietorship and a partnership.

Which of the three types of organizations must file a federal income tax return?

4. Define par value stock. What is the significance of a stock’s par value?

5. What is the preemptive right of a stockholder?

6. What are the basic differences between preferred stock and common stock? What are the typical features

of preferred stock?

7. What features make preferred stock similar to debt? What features make it similar to common stock?

Answer 1

1. (a) Corporation is a sort of large companies or a group of companies which is authorized to act as a single entity to operate a perticular business.

(b) articles of incorporation = Articles of incorporation is a legal document which is filed with the governmental body which is served for the creation of the corporation. It serves as the charter of the company and contains in itself various important and basic information about the company including firms name, address, amount and type of stock to be issued.

(c) corporate = It is a separate legal entity which operates in its own name and have its own common seal and its owners are its stockholders.

2. Limited liability of stockholder means that in the event of liquidation of corporation the liability of the stockholder is limited upto the amount due on the stock held by the stockholder.

Such a feature of corporate attracts investors to invest more money into the stocks of the company since their liability is limited and they do not hesitate to contribute more amount towards the capital of the company and hence, limited liability feature of a corporate enhances its ability to raise capital.

3. Following are the differences between the federal income taxation of a corporation with that of a sole proprietorship and a partnership

a. In case of sole proprietorship and partnership business itself doesn't pay taxes rather all the profits and losses are transferred to the owners and the owner has to pay taxes on it. whereas in case of corporation, it is considered as a separate legal entity and it is liable to pay taxes on any income earned by it.

b. In case of sole proprietorship and partnership there is liability on the owner and the partners to pay self-employment taxes whereas no such liability in case of corporation.

c. In case of partnership, partners can deduct the share of losses of firm from their personal income tax return whereas in case of corporation such thing is not possible for stockholders.

Further a corporation is required to file a federal income tax return.

4. Par value stock means stock having par value which is also means face value, it is the minimum amount at which shares are to be issued, stocks issued at any price above the par value is called addition paid in capital.

Its significance is any amount received over and above par value is to be shown separtely as additional paid in capital, further, par value of the stock is the part of permanent capital of the corporation and cannot distributed as dividend or for other purpose.

5. Preemptive right of a stockholder is the right or we can say a type of privilage which is given to the existing stockholder which gives them right incase of further issue of stocks by the company whereby before offering the stock to general public, company first has to offer the stocks to the existing stockholders of the companyin proportion to their current holding of stocks.

6. Following are the basic differences between the preferred stock and the common stock

Common Stock	Preferred Stock
1. Holder of common stock generally have voting privileges	Holders of preferred stock generally do not have any sort of voting privileges
2. Dividend amount in case of common stock is uncertain and not fixed and	Dividend amount in case of preferred stock is generally fixed and certain
3. Dividend amount in case of common stock is to be decided by the board of directors	Dividend amount in case of preferred stock is prefixed.
4. It is not a hybrid security	It is type of hybrid security containing the features of both bonds as well as common stock in itself

Following are the typical features of preferred stock :-

a. In the event of liquidation, preferred stockholders are given priority over the common stock holders in the payment of their capital amount.

b. preferred stock holders are always given priority in the payment of dividend over the common stock holders.

c. They are generally not given the option of voting.

d. Dividend amount in case of preferred stock is generally fixed at the time of their issue.

7. Following are the features of preferred stock that makes it similar to the debt.

a. fixed interest rate = Like debt has a fixed interest rate similarly, preferred stock also has a fixed amount of dividend.

b. Like debt is less volatile compares to common stock similarly, preferred stock are also less volatile as compared to the common stock.

Following are the features that make preferred stock similar to the common stock :

a. Uncertainity regarding payment of dividend = Unlike interest on debt which is required to be paid by the company whether or not it has earned profit or not, in case of preferred stock dividend are generally paid when the company earns profit similar to the common stock.

b. No obligation of payment of dividend= In case of preferred stock, company is under no obligation to pay dividend similar to the payment of dividend.