3.2.1. Issuance of Common Stock
When a corporation is organized, the corporate charter must state how many shares of each class of stock are authorized. Typically a new corporation will authorize more shares than it needs initially so that it will have a reserve of shares to draw on if it needs to raise additional capital. Otherwise, in the future, if it needs more stock than is authorized, the corporation will have to amend its charter by shareholder vote and also get approval to authorize more shares from the secretary of state. This can be time-consuming and expensive.
The amount of stock authorized for issuance is, not surprisingly, called authorized stock, or authorized shares. The portion of authorized stock that has been sold to shareholders is called issued stock, or issued shares. Treasury stock represents shares of issued stock that have been repurchased by the company and removed from public circulation.
SAMPLE QUESTION
The current share price of XYZ Corporation is $10. XYZ has authorized 20 million shares. It has issued 10 million shares and has repurchased 1 million of those shares (illustrated in the diagram below). How many outstanding shares does XYZ have, and what is XYZ’s market capitalization?
Answer: 9 million, $90 million. Outstanding shares = issued shares – Treasury shares, o