Business Organizations, Part 4
Question 1: Define the following terms:DebentureCallable bondConvertible bondIndentureEquity securities
Answer 1: Debenture -- An unsecured corporate bond which does not have a line of income or a piece of property or equipment to guarantee repayment of principal upon maturity. Callable bond -- a bond that can be redeemed by its issuer prior to maturityConvertible bond -- a bond that can be converted into a specified amount of the corporation’s equity at the discretion of the bondholderIndenture -- a legal document detailing the terms and legal structure under which debt securities are issuedEquity securities -- a security issued by a corporation representing an ownership right in the corporation and a share of the corporation’s profits
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Question 2: Describe the following concepts as they relate to preferred shares of stock:Distribution of dividendsDistribution upon liquidationRedemptionConversionVoting rights
Answer 2: Distribution of dividends -- Holders of preferred shares may receive a share of dividends before common stockholders.Distribution upon liquidation -- Upon the company’s dissolution and liquidation, holders of preferred shares may receive a share of dividends before common stockholders.Redemption -- Regardless of the share owners’ objections, the corporation may be given the right to purchase preferred shares.Conversion -- The corporation may convert preferred shares to common shares, assuming this is stated in the articles of incorporation.Voting rights -- Unless otherwise stated in the articles of incorporation, preferred shareholders generally have no voting rights.
Question 3: Distinguish between dividend and distribution and discuss the following concepts:Decision to declare a dividendForm of dividendRestrictions on dividendsEffect of illegal dividend
Answer 3: A dividend is the distribution in cash or stock of a corporation’s earnings to its shareholders. By contrast, a distribution refers to the distribution of a corporation’s assets (stock not being considered a corporate asset).Decision to declare a dividend -- the prerogative of the board of directors, not subject to shareholders’ desiresForm of dividend -- may be in the form of cash, shares of stock, real estate, or other tangiblesRestrictions on dividends -- Creditors may restrict the corporation’s ability to pay dividends.Effect of illegal dividend -- Any director who promulgates an illegal dividend will be held liable for that portion of the dividend arising from the illegality.
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