Definition of capital stock

capital stock

Ownership shares issued by a business corporation. A business
corporation may issue more than one class of capital stock shares.
One class may give voting privileges in the election of the directors of the
corporation while the other class does not. One class (called preferred
stock) may entitle a certain amount of dividends per share before cash
dividends can be paid on the other class (usually called common stock).
stock shares may have a minimum value at which they have to be issued
(called the par value), or stock shares can be issued for any amount
(called no-par stock). stock shares may be traded on public markets such
as the New York stock Exchange or over the Nasdaq network. There are
about 10,000 stocks traded on public markets (although estimates vary
on this number). In this regard, I find it very interesting that there are
more than 8,000 mutual funds that invest in stocks.

Capital Stock

The total amount of plant, equipment, and other physical capital.

Stockholder equity

Balance sheet item that includes the book value of ownership in the corporation. It
includes capital stock, paid in surplus, and retained earnings.

balance sheet

A term often used instead of the more formal and correct
term—statement of financial condition. This financial statement summarizes
the assets, liabilities, and owners’ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a business’s most
recent balance sheet.

basic earnings per share (EPS)

This important ratio equals the net
income for a period (usually one year) divided by the number capital
stock shares issued by a business corporation. This ratio is so important
for publicly owned business corporations that it is included in the daily
stock trading tables published by the Wall Street Journal, the New York
Times, and other major newspapers. Despite being a rather straightforward
concept, there are several technical problems in calculating
earnings per share. Actually, two EPS ratios are needed for many businesses—
basic EPS, which uses the actual number of capital shares outstanding,
and diluted EPS, which takes into account additional shares of
stock that may be issued for stock options granted by a business and
other stock shares that a business is obligated to issue in the future.
Also, many businesses report not one but two net income figures—one
before extraordinary gains and losses were recorded in the period and a
second after deducting these nonrecurring gains and losses. Many business
corporations issue more than one class of capital stock, which
makes the calculation of their earnings per share even more complicated.

market capitalization, or market cap

Current market value per share of
capital stock multiplied by the total number of capital stock shares outstanding
of a publicly owned business. This value often differs widely from
the book value of owners’ equity reported in a business’s balance sheet.

price/earnings ratio (price to earnings ratio, P/E ratio, PE ratio)

This key ratio equals the current market price
of a capital stock share divided by the earnings per share (EPS) for the
stock. The EPS used in this ratio may be the basic EPS for the stock or its
diluted EPS—you have to check to be sure about this. A low P/E may signal
an undervalued stock or may reflect a pessimistic forecast by
investors for the future earnings prospects of the business. A high P/E
may reveal an overvalued stock or reflect an optimistic forecast by
investors. The average P/E ratio for the stock market as a whole varies
considerably over time—from a low of about 8 to a high of about 30.
This is quite a range of variation, to say the least.

stockholders' equity, statement of changes in

Although often considered
a financial statement, this is more in the nature of a supporting schedule
that summarizes in one place various changes in the owners’ equity
accounts of a business during the period—including the issuance and
retirement of capital stock shares, cash dividends, and other transactions
affecting owners’ equity. This statement (schedule) is very helpful
when a business has more than one class of stock shares outstanding
and when a variety of events occurred during the year that changed its
owners’ equity accounts.

Par value

The stated value of a stock, which is recorded in the capital stock account.
Equity distributions cannot drop the value of stock below this minimum amount.

Depreciation

a) Of capital stock: decline in the value of capital due to its wearing out or becoming obsolete.
b) Of currency: decline in the exchange rate.

Common Stock

That part of the capital stock of a corporation that carries voting rights and represents
the last claim on assets and dividends.

Equity

The net worth of a business, consisting of capital stock, capital (or paid-in) surplus (or retained earnings), and, occasionally, certain net worth reserves. Common equity is that part of the total net worth belonging to the common shareholders. Total equity includes preferred shareholders. The terms common stock, net worth, and common equity are frequently used interchangeably.

Acquisition of stock

A merger or consolidation in which an acquirer purchases the acquiree's stock.

Adjustable rate preferred stock (ARPS)

Publicly traded issues that may be collateralized by mortgages and MBSs.

American Stock Exchange (AMEX)

The second-largest stock exchange in the United States. It trades
mostly in small-to medium-sized companies.

Auction rate preferred stock (ARPS)

Floating rate preferred stock, the dividend on which is adjusted every
seven weeks through a Dutch auction.

Average cost of capital

A firm's required payout to the bondholders and to the stockholders expressed as a
percentage of capital contributed to the firm. Average cost of capital is computed by dividing the total
required cost of capital by the total amount of contributed capital.

Beta equation (Stocks)

The beta of a stock is determined as follows:
[(n) (sum of (xy)) ]-[(sum of x) (sum of y)]
[(n) (sum of (xx)) ]-[(sum of x) (sum of x)]
where: n = # of observations (24-60 months)
x = rate of return for the S&P 500 Index
y = rate of return for the stock

Capital

Money invested in a firm.

Capital account

Net result of public and private international investment and lending activities.

Capital allocation

decision Allocation of invested funds between risk-free assets versus the risky portfolio.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital budget

A firm's set of planned capital expenditures.

Capital budgeting

The process of choosing the firm's long-term capital assets.

Capital expenditures

Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

Capital flight

The transfer of capital abroad in response to fears of political risk.

Capital gain

When a stock is sold for a profit, it's the difference between the net sales price of securities and
their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.

Capital gains yield

The price change portion of a stock's return.

Capital lease

A lease obligation that has to be capitalized on the balance sheet.

Capital loss

The difference between the net cost of a security and the net sale price, if that security is sold at a loss.

Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

Capital market efficiency

Reflects the relative amount of wealth wasted in making transactions. An efficient
capital market allows the transfer of assets with little wealth loss. See: efficient market hypothesis.

Capital market imperfections view

The view that issuing debt is generally valuable but that the firm's
optimal choice of capital structure is a dynamic process that involves the other views of capital structure (net
corporate/personal tax, agency cost, bankruptcy cost, and pecking order), which result from considerations of
asymmetric information, asymmetric taxes, and transaction costs.

Capital market line (CML)

The line defined by every combination of the risk-free asset and the market portfolio.

Capital rationing

Placing one or more limits on the amount of new investment undertaken by a firm, either
by using a higher cost of capital, or by setting a maximum on parts of, and/or the entirety of, the capital
budget.

Capital structure

The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
the ratio of debt to equity and the mixture of short and long maturities.

Capital surplus

Amounts of directly contributed equity capital in excess of the par value.

Capitalization

The debt and/or equity mix that fund a firm's assets.

Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

Capitalization ratios

Also called financial leverage ratios, these ratios compare debt to total capitalization
and thus reflect the extent to which a corporation is trading on its equity. capitalization ratios can be
interpreted only in the context of the stability of industry and company earnings and cash flow.

Capitalization table

A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source - long-term debt and common equity - and the respective capitalization
ratios.

Capitalized

Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures
for items with useful lives greater than one year.

Capitalized interest

Interest that is not immediately expensed, but rather is considered as an asset and is then
amortized through the income statement over time.

Common stock

These are securities that represent equity ownership in a company. Common shares let an
investor vote on such matters as the election of directors. They also give the holder a share in a company's
profits via dividend payments or the capital appreciation of the security.

Common stock/other equity

Value of outstanding common shares at par, plus accumulated retained
earnings. Also called shareholders' equity.

Common stock equivalent

A convertible security that is traded like an equity issue because the optioned
common stock is trading high.

Common stock market

The market for trading equities, not including preferred stock.

Common stock ratios

Ratios that are designed to measure the relative claims of stockholders to earnings
(cash flow per share), and equity (book value per share) of a firm.

Complete capital market

A market in which there is a distinct marketable security for each and every
possible outcome.

Conflict between bondholders and stockholders

These two groups may have interests in a corporation that
conflict. Sources of conflict include dividends, distortion of investment, and underinvestment. Protective
covenants work to resolve these conflicts.

Convertible exchangeable preferred stock

Convertible preferred stock that may be exchanged, at the
issuer's option, into convertible bonds that have the same conversion features as the convertible preferred
stock.

Convertible preferred stock

Preferred stock that can be converted into common stock at the option of the holder.

Cost of capital

The required return for a capital budgeting project.

Cost of limited partner capital

The discount rate that equates the after-tax inflows with outflows for capital
raised from limited partners.

Cumulative preferred stock

Preferred stock whose dividends accrue, should the issuer not make timely
dividend payments. Related: non-cumulative preferred stock.

Dedicated capital

Total par value (number of shares issued, multiplied by the par value of each share). Also
called dedicated value.

Direct stock-purchase programs

The purchase by investors of securities directly from the issuer.

Dividend yield (Stocks)

Indicated yield represents annual dividends divided by current stock price.

Efficient capital market

A market in which new information is very quickly reflected accurately in share
prices.

Employee stock fund

A firm-sponsored program that enables employees to purchase shares of the firm's
common stock on a preferential basis.

Employee stock ownership plan (ESOP)

A company contributes to a trust fund that buys stock on behalf of
employees.

Exchange of stock

Acquisition of another company by purchase of its stock in exchange for cash or shares.

Growth stock

Common stock of a company that has an opportunity to invest money and earn more than the
opportunity cost of capital.

Hard capital rationing

capital rationing that under no circumstances can be violated.

Human capital

The unique capabilities and expertise of individuals.

Income stock

Common stock with a high dividend yield and few profitable investment opportunities.

Issued share capital

Total amount of shares that are in issue. Related: outstanding shares.

Legal capital

Value at which a company's shares are recorded in its books.

Letter stock

Privately placed common stock, so-called because the SEC requires a letter from the purchaser
stating that the stock is not intended for resale.

Listed stocks

stocks that are traded on an exchange.

Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.

Listed stocks

stocks that are traded on an exchange.

Margin account (Stocks)

A leverageable account in which stocks can be purchased for a combination of
cash and a loan. The loan in the margin account is collateralized by the stock and, if the value of the stock
drops sufficiently, the owner will be asked to either put in more cash, or sell a portion of the stock. Margin
rules are federally regulated, but margin requirements and interest may vary among broker/dealers.

Market capitalization

The total dollar value of all outstanding shares. Computed as shares times current
market price. It is a measure of corporate size.

Market capitalization rate

Expected return on a security. The market-consensus estimate of the appropriate
discount rate for a firm's cash flows.

Net working capital

Current assets minus current liabilities. Often simply referred to as working capital.

New York Stock Exchange (NYSE)

Also known as the Big Board or The Exhange. More than 2,00 common
and preferred stocks are traded. The exchange is the older in the United States, founded in 1792, and the
largest. It is lcoated on Wall Street in New York City

Non-cumulative preferred stock

Preferred stock whose holders must forgo dividend payments when the
company misses a dividend payment.
Related: Cumulative preferred stock

Nondiversifiability of human capital

The difficulty of diversifying one's human capital (the unique
capabilities and expertise of individuals) and employment effort.

Opportunity cost of capital

Expected return that is foregone by investing in a project rather than in
comparable financial securities.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Outstanding share capital

Issued share capital less the par value of shares that are held in the company's treasury.

Pecking-order view (of capital structure)

The argument that external financing transaction costs, especially
those associated with the problem of adverse selection, create a dynamic environment in which firms have a
preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated
funds are the most preferred, new debt is next, debt-equity hybrids are next, and new equity is the least
preferred source.

Perfect capital market

A market in which there are never any arbitrage opportunities.

Perfect market view (of capital structure)

Analysis of a firm's capital structure decision, which shows the
irrelevance of capital structure in a perfect capital market.

Personal tax view (of capital structure)

The argument that the difference in personal tax rates between
income from debt and income from equity eliminates the disadvantage from the double taxation (corporate
and personal) of income from equity.

Philadelphia Stock Exchange (PHLX)

A securities exchange where American and European foreign
currency options on spot exchange rates are traded.

Pie model of capital structure

A model of the debt/equity ratio of the firms, graphically depicted in slices of
a pie that represent the value of the firm in the capital markets.

Planned capital expenditure program

capital expenditure program as outlined in the corporate financial plan.

Preferred equity redemption stock (PERC)

Preferred stock that converts automatically into equity at a
stated date. A limit is placed on the value of the shares the investor receives.

Preference stock

A security that ranks junior to preferred stock but senior to common stock in the right to
receive payments from the firm; essentially junior preferred stock.

Preferred stock

A security that shows ownership in a corporation and gives the holder a claim, prior to the
claim of common stockholders, on earnings and also generally on assets in the event of liquidation. Most
preferred stock pays a fixed dividend that is paid prior to the common stock dividend, stated in a dollar
amount or as a percentage of par value. This stock does not usually carry voting rights. The stock shares
characteristics of both common stock and debt.

Preferred stock agreement

A contract for preferred stock.

Pro forma capital structure analysis

A method of analyzing the impact of alternative capital structure
choices on a firm's credit statistics and reported financial results, especially to determine whether the firm will
be able to use projected tax shield benefits fully.

Real capital

Wealth that can be represented in financial terms, such as savings account balances, financial
securities, and real estate.

Repurchase of stock

Device to pay cash to firm's shareholders that provides more preferable tax treatment
for shareholders than dividends. Treasury stock is the name given to previously issued stock that has been
repurchased by the firm. A repurchase is achieved through either a dutch auction, open market, or tender offer.

Reverse stock split

A proportionate decrease in the number of shares, but not the value of shares of stock
held by shareholders. Shareholders maintain the same percentage of equity as before the split. For example, a
1-for-3 split would result in stockholders owning 1 share for every 3 shares owned before the split. After the
reverse split, the firm's stock price is, in this example, worth three times the pre-reverse split price. A firm
generally institutes a reverse split to boost its stock's market price and attract investors.

"Soft" Capital Rationing

capital rationing that under certain circumstances can be violated or even viewed
as made up of targets rather than absolute constraints.

Static theory of capital structure

Theory that the firm's capital structure is determined by a trade-off of the
value of tax shields against the costs of bankruptcy.

Stock

Ownership of a corporation which is represented by shares which represent a piece of the corporation's
assets and earnings.

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