Question

Assume you are the chief accountant making a presentation during the stockholders annual meeting for your corporation. Provide a brief explanation to stockholders on each of the following questions:

Shares

In what ways can shares be “preferred”? In which ways are they similar and different from common shares?   Give real-world examples.

How does the book value of shares of stock differ from the market value of shares of stock? Use a real-world example in your answer.

Dividends

Discuss at least three key issues that a board of directors considers when making a dividend declaration decision.

How does a share dividend differ from a share split?

Retained Earnings

Explain why companies place restrictions on some of their retained earnings.

Answer 1

1. Company has mainly two ways to Raise the capital , in which common stock is more popular than the preferred stock.. Though Preferred stock has similar characteristics like common stock but they differ in few aspects.

Company issues preferred stock to maintain the debt equity ratio, as it helps to gain leverage which helps in future financials needs of the business. Its considered as preferred as its provide consistent dividend and also in case of wind up preferred stockholders receive assets before common stockholders. Preffered stockholders doesnt have voting rights like Common stockholders.

Similarity

• Both Preffered and common Stockholders are part of the capital of the company
• They also are traded the Stock Market.
• Company doesnt have obligations to pay dividend to both kind of shareholders.

Difference

• Dividend for preffered are paid on time with fixed percentage but for common stock its fluctuates and there is no fixed.
• In case of bankruptcy, preffered stock are given more prefference than common stock to distribute the company asset.
• Preffered stock can be converted into Common stock but common stock doesnt hav this feature.

2)Key issues -

• Balance in Retained earnings- Dividends are paid from the balance available in the retained earnings, Also creditors may put some restrictions with respect to some amount for their own security. If the company doesnt have the sufficent balance in retained earnings then it has to cancel for the declaration of dividend.
• Future Growth- Before announcing any dividend board also for their future projects and the financials need for those projects. Paying dividend will reduce the amount of equity and it may affect the future projects and also it will force company to raise more money.
• Cost Factors- Debt interest are the fixed payment obligation for any company and so board can decide to reduce the debt instead of paying dividend.

share dividend differ from a share split

Share dividend are similar to the cash dividend so here instead of cash, stock is given, In case of share split is done because company may feel its share in the market is running at too high price.

In case of share dividend, the Outstanding share will increase and share price will decrease. Stock split is done to make stock more liquid and investors can purchase it easily.

3) companies place restrictions on some of their retained earnings.

As per the law, it requires the company to place restrictions on certain amount of retained earnings for the security of the creditors debt with the company.

Also when entering the loan agreements it may also fixes a amount not to used for the dividend purpose.