ADMS 1500 Lecture Notes - Lecture 11: Stock Split, Net Income, Retained Earnings

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A business may be thought of as two separate, but related, decision activates: The common share, the retained earning and the preference shares are all equity capital. The company can finance its investments through borrowing. Debt has an interest and repayment obligation. Debt to equity ratio: total debt/total equity*100. Debt to assets ratio: total debt/total assets*100. < debt is much higher risk for the borrowing company ( and lower risk than shares ) for the lender > Common shares represent the underlying ownership of the business, so all companies must have them. The company never has to repay common shares. The company get no direct benefit or harm from changes in share prices. Preference shares have some right that sets them aside from common shareholders, generally a preferential right to receive a fixed amount of dividend. Participating (may earn dividends in excess of the minimum);

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