Question

Corporations: Organization, Stock Transactions, and Dividends Using the annual report of the corporation that you have been researching these weeks, take a look at that corporation's Statement of Stockholders' Equity. Tell us about the common stock that it issued including its outstanding shares. Also, take a look at a website, such as Yahoo Finance and find information about the corporation's price per share and whether or not it issues a dividend. Your corporation could have probably raised a lot of money by issuing long-term debt instead of issuing stock. What are some advantages of issuing common stock instead of issuing long-term debt? What are some disadvantages?

International Business Machines Corp., Consolidated Statement of Financial Position, Liabilities and Stockholders' Equity
USD $ in millions
	Dec 31, 2017	Dec 31, 2016	Dec 31, 2015	Dec 31, 2014	Dec 31, 2013
Taxes	4,219	3,235	2,847	5,084	4,633
Short-term debt	6,987	7,513	6,461	5,731	6,862
Accounts payable	6,451	6,209	6,028	6,864	7,461
Compensation and benefits	3,644	3,577	3,560	4,031	3,893
Deferred income	11,552	11,035	11,021	11,877	12,557
Other accrued expenses and liabilities	4,510	4,706	4,352	6,013	4,748
Current liabilities	37,363	36,275	34,269	39,600	40,154
Long-term debt	39,837	34,655	33,428	35,073	32,856
Retirement and nonpension postretirement benefit obligations	16,720	17,070	16,504	18,261	16,242
Deferred income	3,746	3,600	3,771	3,691	4,108
Income tax reserves	4,193	2,621	3,150	3,146	3,189
Excess 401(k) Plus Plan	1,583	1,494	1,445	1,658	1,673
Disability benefits	504	538	590	675	699
Derivative liabilities	38	61	22	31	126
Workforce reductions	804	782	769	900	940
Deferred taxes	545	424	253	288	1,741
Other taxes payable	948	90	89	17	186
Environmental accruals	262	262	270	240	231
Warranty accruals	56	68	83	91	171
Asset retirement obligations	115	142	134	136	129
Acquisition related	88	111	200	50	205
Divestiture related	253	270	575	1,124	40
Other	576	615	519	537	604
Other liabilities	9,965	7,478	8,099	8,893	9,934
Noncurrent liabilities	70,268	62,803	61,802	65,918	63,140
Total liabilities	107,631	99,078	96,071	105,518	103,294
Common stock, par value $.20 per share, and additional paid-in capital	54,566	53,935	53,262	52,666	51,594
Retained earnings	153,126	152,759	146,124	137,793	130,042
Treasury stock, at cost	-163,507	-159,050	-155,518	-150,716	-137,242
Accumulated other comprehensive loss	-26,591	-29,398	-29,606	-27,875	-21,602
Total IBM stockholders' equity	17,594	18,246	14,262	11,868	22,792
Noncontrolling interests	131	146	162	146	137
Total equity	17,725	18,392	14,424	12,014	22,929
Total liabilities and equity	125,356	117,470	110,495	117,532	126,223

Answer 1

The common stock issued in the latest year is 54,566 million at $20 each. Now this report does not mention the preferred stocks. Hence we can assume that the preferred stocks are included in common stocks list. In order to calculate the total outstanding shares we need to subtract the treasury stock from the sum of common stocks and the preferred stocks. Hence the number of outstanding shares (in the provided balance sheet) is 54566-(-163507) = 218073.

The advantages of issuing common stocks are

Cash reserve: When common stocks are issued, the company does not need to pay a regular debt (installment) payment. As a result, the company has higher cash reserve and can utilize that fund to grow the business.

Credit rating: With higher amount of debt on the company, the credit rating usually suffers. The company is often identified as credit hungry and make future financing difficult. Common stock issue means higher credit rating and improves the market perception.

Restrictions: When companies raises funds through long term debt, it means that the company’s earnings after tax, interest, and other deductions reduce. As a result, the company’s dividend on shares reduce. This makes the company less attractive in the market. However, with common stocks, such restrictions does not come into place and company can operate with more freedom.

The disadvantage of issuing common stocks are

Voting rights: The number of people/owners of stocks increases. This means the voting rights also increases and the company is in the risk of losing control.

Dividend: Dividend payments are usually in form of percentage of profit. Long-term debt on the other hand has a fixed payment amount. When a company performs well, the dividend payment system may end up paying more to the shareholders than the cost of long-term debt.

Misc cost: When issuing common stocks the procedure can be cumbersome. The company needs to spend additional fund in order to underwrite and distribute the stocks.