Page 443 - Business Principles and Management

Unit 5

Retained earnings are not kept in the form of cash only. Retained earnings may
be tied up in such current assets as inventories and accounts receivable, which are
later converted to cash. Any unused earnings should be invested in short- or long-
term securities that earn interest for the company. Because retained earnings are a
part of owner’s equity, the earnings can be used for investment purposes and future
expansion.

CHECKPOINT

How is the book value of stock determined?

16.2 Assessment

UNDERSTAND MANAGEMENT CONCEPTS
Determine the best answer for each of the following questions.
1. Which of the following statements about preferred stock owner-
ship is true?
a. Preferred stock owners are given one vote per share on corpo-
rate matters.
b. Preferred stock owners cannot lose the amount of their invest-
ment if the business fails.
c. Preferred stock owners receive a guaranteed dividend from the
company’s profits.
d. All of the statements are true.
2. The ____ value of a share of stock is calculated by dividing the cor-
poration’s net worth by the total number of shares outstanding.
a. book
b. par
c. market
d. selling

THINK CRITICALLY
Answer the following questions as completely as possible.
3. If you had a choice of becoming a preferred or common stock-
holder in a new small corporation, which would you choose?
Explain your choice.
4. The board of directors of a corporation of which you are a stock-
holder consistently votes to put 60 percent of profits in retained
earnings and distributes only 40 percent to stockholders as divi-
dends. The business is always profitable and you have received
a small dividend each year. Do you agree or dis-
agree with the board’s policy? Justify your answer.

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