Microsoft Word - Money, Banking, and Int Finance(scribd).docx

Money, Banking, and International Finance

taxes, finance, and accounting, who handle operations for foreign countries. Advantages of the
corporate form include:

 A corporation has limited liability. Stockholders own the corporation, and they are not

liable for a corporation's debt. If a corporation fails, subsequently, the stockholders only

lose their investment, the amount of common stock that they had purchased.

 Stockholders can easily transfer corporate ownership. Stocks are certificates that represent

ownership in a corporation, and stockholders can freely buy or sell stock to other investors

through the stock market.

 Corporations have continuity of life. Theoretically, a corporation could live forever.

 Stockholders do not have a mutual agency relationship, where the stockholders cannot

bind a corporation to contracts. Stockholders have no say in the daily operation of the

corporation even though they own the corporation.

Corporations have two disadvantages. First, government heavily regulates corporations.
Corporations file many reports with government because corporations can expand into many
countries, markets, and industries. Corporations may encourage regulations because
bureaucratic red tape creates barriers to entry. Thus, new companies experience troubles
entering the market with complex and arduous regulations. Second, government imposes taxes
twice on corporations. Corporations pay taxes from their profits. Then stockholders receive
profit from the corporation as dividends, and the dividends become income to the stockholder
that a government also taxes.
Corporations could issue two different classes of stock: common stock and preferred stock.
Common stock allows stockholders to vote at stockholder meetings, while preferred stock does
not have any voting rights. For stockholders to give up their voting right, they will receive their
dividends before the common stockholders. Consequently, a corporation could issue preferred
stock to expand operations and not share control of the corporation with the new preferred
stockholders. Moreover, corporations can pay different dividends, paying a higher dividend to
the common shareholders.
We define preferred stock by the following categories:

 Cumulative Preferred Stock – a corporation must pay past-due dividends to cumulative

preferred stockholders before it pays dividends to common stockholders. Stockholders only

receive dividends, when the board of directors declares them.

 Protected Preferred Stock – a corporation must deposit part of its profits into a fund, and,

thus, the corporation can guarantee dividend payments to preferred stockholders.

 Redeemable Stock – a corporation has the right to repurchase the preferred stock in the

future.