Shareholders’ Equity

Key Points

The following key points are emphasized in this chapter:

  • The three forms of financing and their relative importance to major U.S. corporations.
  • Distinctions between debt and equity.
  • Economic consequences associated with the methods used to account for shareholders' equity.
  • Rights associated with preferred and common stock and the methods used to account for stock issuances.
  • Distinctions among the market value, book value, and par (stated) value of a share of common stock.
  • What treasury stock is, why it is purchased, and how it is accounted for.
  • Cash dividends and dividend strategies followed by corporations.
  • Stock dividends and stock splits.

General Electric announced in February of 2009 that it was cutting its cash dividends by 68 percent, reducing the quarterly payout from 31 to 10 cents per share, the first such drop in 71 years. GE estimated that the annual savings would amount to $9 billion. The company was not alone. The Wall Street Journal (2/28/2009) reported that stalwart names such as JPMorgan Chase, Dow Chemical, Pfizer, Textron, CBS, and Citigroup announced similar plans to reduce dividends and retain capital. In early 2009 very few companies were immune to the need to maintain their equity bases, as former high fliers, including Blackstone Group, either cut or eliminated their dividends. The shortage of capital became even more apparent when the federal government stepped in to inject equity into such well-known names as ...

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