CHAPTER 7 Stock Valuation 311supervoting shares
Stock that carries with it
multiple votes per share rather
than the single vote per share
typically given on regular shares
of common stock.
nonvoting common stock
Common stock that carries no
voting rights; issued when the
firm wishes to raise capital
through the sale of common
stock but does not want to give
up its voting control.
proxy statement
A statement giving the votes of a
stockholder to another party.
EXAMPLE Golden Enterprises, a producer of medical pumps, has the following stockhold-
ers’ equity account on December 31:Stockholders’ Equity
Common stock—$0.80 par value:
Authorized 35,000,000 shares;
issued 15,000,000 shares $ 12,000,000
Paid-in capital in excess of par 63,000,000Retained earnings (^3) (^1) , (^0) (^0) (^0) , (^0) (^0) (^0)
$106,000,000
Less: Cost of treasury stock (1,000,000 shares) (^4) , (^0) (^0) (^0) , (^0) (^0) (^0)
Total stockholders’ equity $
1
0
2
,
0
0
0
,
0
0
0
How many shares of additional common stock can Golden sell without gain-
ing approval from its shareholders? The firm has 35 million authorized shares, 15
million issued shares, and 1 million shares of treasury stock. Thus 14 million
shares are outstanding (15 million issued shares 1 million shares of treasury
stock), and Golden can issue 21 million additional shares (35 million authorized
shares 14 million outstanding shares) without seeking shareholder approval.
This total includes the treasury shares currently held, which the firm can reissue
to the public without obtaining shareholder approval.
Voting Rights
Generally, each share of common stock entitles its holder to one vote in the elec-
tion of directors and on special issues. Votes are generally assignable and may be
cast at the annual stockholders’ meeting.
In recent years, many firms have issued two or more classes of common
stock; they differ mainly in having unequal voting rights. A firm can use different
classes of stock as a defense against a hostile takeoverin which an outside group,
without management support, tries to gain voting control of the firm by buying
its shares in the marketplace. Supervoting sharesof stock give each owner multi-
ple votes. When supervoting shares are issued to “insiders,” an outside group,
whose shares have only one vote each typically cannot obtain enough votes to
gain control of the firm. At other times, a class of nonvoting common stockis
issued when the firm wishes to raise capital through the sale of common stock but
does not want to give up its voting control.
When different classes of common stock are issued on the basis of unequal
voting rights, class A common is typically—but not universally—designated as
nonvoting, and class B common has voting rights. Generally, higher classes of
shares (class A, for example) are given preference in the distribution of earnings
(dividends) and assets; lower-class shares, in exchange, receive voting rights.
Treasury stock, which is held within the corporation, generallydoes nothave
voting rights,does notearn dividends, anddoes nothave a claim on assets in
liquidation.
Because most small stockholders do not attend the annual meeting to vote, they
may sign aproxy statementgiving their votes to another party. The solicitation of