Common Stock - Business Finance - ثاني ثانوي

. Luk digestop 7.2 Common Stock www.iem.edu.sa Key Terms Common stock Board of directors Common Back Security representing ownership in a corporation thuse who own these securities have a final claim on the firm's assets and earnings after the firm has met its obligations to creditors and preferred stockholders Board of director Body elected by and responsible to stockholders to set policy and hire management so una corporation Prospectus Retained eamings Articles of association/Articles Preemptive rights Tradable rights Acquisition of incorporation Treasury shares Common stock is direct equity ownership in a corporation. Common stockholders have the right to: ⚫ attend a company's stockholder general assembly meeting and receive dividends when distributed; ⚫ vote for a corporation's board of directors; and ■ purchase, as a priority, additional shares stock if the company issues new shares. Shareholders have residual claims on the assets and earnings of a corporation. In case of liquidation, the holder of common stock receives whatever is left after all other claims have been satisfied. A common stockholder receives earnings that have accrued after expenses, interest, and preferred stock dividends are paid. Common stock investors bear the risk and reap the rewards associated with the ownership of a corporation. Investors who purchase common stock receive all the rights of ownership including the right to "vote the shares" to elect the corporation's board of directors. Voting is typically based on the proportion of stock ownership. Stockholders who own 20% of the common stock of a company would have 20 times more shares of the vote than a stockholder with 1% of the common stock. The board of directors selects the company's management. Management is then responsible to the board of directors, which, in turn, is responsible to the company's stockholders. If the stockholders do not think that the board is doing a competent job, they may elect another board to represent them. 270 Business Finance

Fahd's company has a set of bylaws, or procedures, for the operation of a joint stock company called articles of association or articles of incorporation. These articles indicate the total number of shares of common stock and preferred shares authorized to be issued by the company. The board may not want to have all authorized common stock shares issued, or floated, to the public for sale as outstanding shares. Some shares remain with the company as treasury slaves. Treasury shares are stock held by the company for use as employee stock. Turki and the board strongly believe that an employee share strategy is needed for their business to hire the best employees. Employees who stay with the business can receive shares of stock in the company. If the company meets performance goals, then management can be awarded additional shares as incentives. Auncle of son Anicles of incorporation Bylaws, or procedures, for the operation of a joint stock company Treeshares Stota held by the company for use as employee stock Why should the board of directors and the company's management be separate? 271

Prospectus W document that provides information about any investment such as a stock or mutual fund There are multiple considerations in determining how to fund the operations of a company. Fahd's company's articles of association authorized the company to issue two million shares of common stock. One million shares were floated or issued to the public. As a publicly traded company, major financing decisions must be made public in a prospectus, a document that provides information about an investment such as a stock or mutual fund. The Saudi CMA requires that a company's prospectus must contain all information necessary for an investor to make an assessment of the activities, assets and liabilities, financial position, management, and prospects for the company's profits and losses so investors can monitor the business's finances. In addition, the prospectus must include information related to the number and price of the securities, and any obligations, rights, powers, and privileges related to the securities. What information might be included in a company's prospectus?

Figure 7.1 shows a simplified balance sheet for Fahd's company at the beginning of the year. The company has SAR 100 million in assets for the business to use to generate sales. This is balanced against debt of SAR 30 million and equity consisting of outstanding stock paid in, or share capital, of SAR 40 million and retained earnings of SAR 30 million. All Numbers in SAR (million) FIGURE 7.1 Balance Sheet Simplified Balance Sheet Start of Year Assets 100 Liabilities and Equity Debr 30 Owner's Equity Share Capital Retained Earnings 40 30 100 Fahd's company set an initial nominal value, or actual value, per share price for common stock for accounting purposes. In the balance sheet, the share capital represents the funds produced by the sale of outstanding stock. When Fahd's company issued stock through its investment bank, the funds received for the outstanding stock represent the stock share capital invested in the company. This has no relationship to the current stock price of shares in the open market. The open market prices are determined by the supply and demand for the stock shares. Retained earnings represent the accumulated profit of the company that have not been distributed since the company's inception and, like the common stock, represent an investment in the company by common stockholders. Because these stockholders would receive the earnings if they were distributed, retained earnings are part of the stockholders' contribution to the company. To raise additional funds, Fahd's company could try to issue the full remaining one million authorized shares. But this would mean that the current owner's equity of SAR 70 million would now need to be distributed across two million shares instead of one million shares. In addition, a current common stockholder would see their voting rights cut in half, Current stockholders could see a considerable reduction in the value of their stock. Tuned in Accumulated profit after dividends وزارة التعليم CHAPTER 7 Stocks and Bonds 273

The night of cument stockholders to maintain their proportionate ownership in the company Tradable nights The enullement to subscribe to new shares listed during à capital increase, such as the salle of new stock snares If Fahd's company is not able to provide expected returns to common stock owners, the stock owners could vote for new board members to replace management. Fahd has seen that his company's articles of association authorize proumptive rights, which is the right of a current stockholder to maintain their proportionate ownership in the company if the company issues shares for sale. If the company wants to sell additional shares to the public, these new shares must be offered initially to the existing stockholders in a sale based on tradable rights. x In the balance sheet what does share capital represent? AUSETS BALANCE SHEETS CURRENT ASSENTS Cust INVITY TOTAL RE NIK LOMMENT EQUITY www 3115 DI 200985 www Sall 339

The board of directors of Fahd's company have set a goal of having the company's stock listed in a Saudi fund. Funds are professionally managed, and these money managers often press corporate executives to achieve higher earnings and returns for stockholders. Funds and other organizations that purchase large blocks of stock will have large numbers of voting shares. If management is unable to achieve its goals, these money managers may seek the replacement of management or the acquisition of the corporation by another company whose goal is higher stock returns. The threat of a change in management or a takeover often encourages a corporation's board of directors and current executives to pursue strategies that increase the value of the company's stock. Fahd wants to ensure that the company is working for all equity investors. This requires that the company provides the expected return on investment for shareholders. Common stockholder returns come from two sources: 1. increases in the value of the common stock; and 2. dividends paid to stockholders. Fahd will need to recommend a dividend policy to his company's board of directors. Acquistion The purchase of a company by another company Exercises Choose the correct answer. 1. To obtain assets to operate, a company must find sources of funding through either equity or debt. True/False 2. A business must pay earnings to the owners before interest payments on debt. True/False وزارة التعليم CHAPTER 7 Stocks and Bonds 275