Stock issuance is a critical aspect of corporate finance, enabling companies to raise capital for expansion, debt reduction, and strategic investments. This process involves issuing new shares to investors, which can be common or preferred, each offering different rights and benefits. The capital raised through stock issuance can lead to shareholder dilution but also provides financial leverage and growth opportunities for the company.
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Stock issuance is the process of a corporation issuing new shares to investors in order to raise capital
Issuing Company
The issuing company is the corporation that is selling new shares to investors
Underwriters
Underwriters, often investment banks, manage the sale of the new shares
Investors
Investors are the individuals or entities purchasing the new shares
Companies must adhere to strict regulations, such as those enforced by the Securities and Exchange Commission, before issuing new stock
Common stock provides shareholders with ownership in the company and potential dividends, but they are last in line for asset distribution in the event of liquidation
Preferred stock offers a fixed dividend and takes precedence over common stock in asset distribution, but does not confer voting rights
The price of newly issued stock is determined by the company's perceived value, which is influenced by earnings, growth prospects, and market conditions
Companies may issue stock to quickly raise capital for growth initiatives or new ventures
Stock issuance can also be used to reduce existing debt and improve the company's financial standing
In mergers and acquisitions, stock issuance can provide the necessary capital to execute these complex corporate actions
Accurate recording of stock issuance is crucial for maintaining meticulous financial records
Debits and Credits
Stock issuance involves debiting the 'Cash' account and crediting the 'Common Stock' or 'Preferred Stock' account
Fundamental Accounting Equation
Journal entries for stock issuance must follow the fundamental accounting equation of Assets = Liabilities + Stockholders' Equity
Stock issuance can lead to dilution of existing shareholders' interests, altering their voting power and control within the company
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Before a company can release new stock, it must get approval from its ______ and comply with regulations like those from the ______ in the U.S.
board of directors
Securities and Exchange Commission
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Types of stock issued by corporations
Common stock with voting rights and potential dividends; Preferred stock with fixed dividends, no voting.
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Asset distribution order in liquidation
Preferred stockholders are prioritized over common stockholders for asset distribution.
