The Complete CFO Handbook

Chapter 4. Equity Funding

Agenda

Item 1	Differentiate between the two types of stock: common and preferred.
Item 2	Explain what is meant by privately held stock, publicly held stock, and classifed stock.
Item 3	Describe the different types of dividend policy.
Item 4	Discuss the different views on dividend policy and the views on dividends (irrelevance theory, “bird in the hand” theory, tax preference theory, signaling theory, and agency theory).
Item 5	Explain why corporations issue preferred stock.
Item 6	Identify the ways a corporation can repurchase stock.
Item 7	Describe the different types of preferred stock.

Acorporation's stock may be divided into two major types—common stock and preferred stock. Both may be split into smaller classes of stock. And each of these classes is split into smaller pieces called shares. Owners of these shares are referred to as shareholders or stockholders. Preferred stock and common stock have different rights. Preferred shareholders are given preference over common shareholders: They have the right to receive income ahead of common shareholders. Shareholders receive part of the return on their investment from dividends, which are periodic cash payments from the corporation. Dividends promised to preferred shareholders must be paid before common shareholders can receive any dividends.

If the company is liquidated, the assets are sold and the proceeds of the sale are distributed to creditors and owners. Preferred shareholders are given preference over common shareholders ...