ABSTRACT
In this chapter we consider common and preferred stock, which together comprise equity capital, the first of two major classes of external corporate financing; note that the terms equity capital, stock, and shares are synonymous. We commence with a review of why and how stock is used, the relative costs and benefits of borrowing through the equity markets, and the tradeoffs that exist between using too much and too little equity financing. We then analyze dividend policy and the forces that determine equity costs and share values. We conclude the chapter by describing the characteristics of major classes of stock and how the instruments are issued and traded. The material in this chapter should be compared and contrasted with the debt financing discussed in the next chapter.
