Chapter 11 Stockholders’ Equity: Capital Stock and Dividends 497
Shares of stock are often assigned a monetary amount, called par. Often, this
amount is related to state laws requiring a minimum stockholder contribution, called
legal capital. Stock may also be issued without par, in which case, it is called no-par stock.
Some states require the board of directors to assign a stated valueto no-par stock.
Market for Common Stock
A public company may sell common stock to the general public, which can then be
traded on a stock exchange. Three major types of stock market transactions are possible:
- An initial public offering (IPO). An IPO is a company’s first issue of common stock
to the public, and thus the first step to becoming a publicly owned company. For
example,Googlesold 10% of its common shares at an IPO price of $85 per share.^3
In addition, IPOs are common for corporate spin-offs into separately held compa-
nies. For example, DreamWorks LLCsoldDreamWorks Animation Inc.to the
public through an IPO. In either case, the issuing company will often use invest-
ment bankers, such as Merrill Lynch, to help sell an IPO to the general public,
which is called the primary market. - Additional shares sold by an established public company. Established publicly owned
companies can raise additional equity capital by selling common stock to the public.
Like IPOs, such shares are sold by investment bankers in the primary market. - Market exchanges between owners of a publicly held company. By far, the most wide-
spread stock market transactions occur between buyers and sellers of outstanding
common stock. These transactions occur on the secondary market. The largest sec-
ondary markets in the United States are the New York Stock Exchange (NYSE) and
National Association of Security Dealers Automated Quotation (NASDAQ). The
market price can be determined for any company listed on an organized exchange
from numerous Internet sites and from daily financial publications. A sample quo-
tation from The Wall Street JournalforWal-Martis explained as follows:
The preceding quotation is interpreted as follows:YTD % CHG The year-to-date cumulative percentage change in the price
Hi Highest price during the past 52 weeks
Lo Lowest price during the past 52 weeks
Stock Name of the company
Sym Stock exchange symbol (WMT for Wal-Mart)
Div Dividends paid per share during the past year
Yld % Annual dividend yield per share, based on the closing price (Wal-Mart’s
1% yield on common stock is computed as $0.52/$53.29)
PE Price-earnings ratio on common stock (price ÷ earnings per share)
Vol The volume of stock traded in 100s for that day
LAST Closing price for the day
Net Chg The net change in price from the previous dayYTD 52 Weeks Yld Vol Net
% CHG Hi Lo Stock Sym Div % PE 100s LAST Chg
0.9 6131 5108 WalMart WMT .52 1.0 23 82260 5329 +0.073 Google broke tradition by issuing its IPO shares using an auction approach, rather than investment
bankers. This may become more popular in the future.