Definition
Stated Value is a nominal value assigned by a corporation to its stock shares for accounting purposes, seen as an alternative to par value. While par value is a historical concept primarily used to protect creditors, stated value serves more as an internal bookkeeping convenience. It essentially forms the baseline value in a company’s shareholders’ equity section on its balance sheet. Importantly, the stated value does not correlate with the stock’s market value, which fluctuates based on supply and demand dynamics in the market.
For instance, if a corporation assigns a stated value of $1 per share and issues 10 million shares, the stated value of its stock would aggregate to $10 million. This value plays a role in corporate accounting but bears no impact on the stock’s trading price in the market.
Examples
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New Company Incorporation: A newly formed corporation issues 1 million shares of common stock, assigning a stated value of $0.50 per share. This results in a total stated value of $500,000 recorded under shareholders’ equity.
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Initial Public Offering (IPO): A corporation is preparing for an IPO and assigns a stated value of $1 per share for its 5 million shares. Even if the shares are anticipated to trade at $20 each following the IPO, the stated value for accounting purposes remains at $5 million.
Frequently Asked Questions (FAQs)
Q1: How is stated value different from par value?
- A1: While both are nominal values assigned for accounting purposes, par value is often a legal minimum price below which shares cannot be issued, protecting creditors. Stated value, on the other hand, is a modern replacement that’s more flexible and carries no legal price floor.
Q2: Does the stated value affect the stock’s market price?
- A2: No, the stated value is purely for accounting purposes and does not affect the stock’s market price. The market price is influenced by market conditions, company performance, investor perceptions, etc.
Q3: Why do companies use stated value?
- A3: Companies use stated value to simplify bookkeeping and reflect part of the shareholders’ equity in a straightforward manner. It helps record the equity portion contributed by the shareholders without dealing with complex par value regulations.
Q4: Can the stated value be changed after it’s established?
- A4: Generally, the stated value remains fixed once assigned. However, any changes would typically require board approvals, amendments to corporate charters, and adherence to legal requirements.
Q5: Does every share have a stated value?
- A5: Not necessarily. Some shares might be issued without stated value or any par value, often designated as non-par stock. The approach can vary based on corporate policies and jurisdictions.
- Par Value: A nominal value stated in the corporate charter below which share cannot be issued.
- Common Stock: Equity ownership in a corporation, representing a claim on part of the corporation’s profits.
- Shareholders’ Equity: The owners’ residual claim after liabilities are deducted from assets.
- Book Value: The value of an asset according to its balance sheet account balance.
Online References
Suggested Books for Further Studies
- Stock Valuation: An Essential Guide by aptly placed financial authors with a chapter on stated value.
- Principles of Corporate Finance by Richard Brealey, Stewart Myers, and Franklin Allen.
- Financial Accounting: Tools for Business Decision Making by Paul D. Kimmel, Jerry J. Weygandt, and Donald E. Kieso.
Fundamentals of Stated Value: Corporate Finance Basics Quiz
### Does stated value affect a stock’s market price?
- [ ] Yes, stated value directly influences the stock's market price.
- [x] No, stated value does not affect the stock's market price.
- [ ] It depends on the company's total market capitalization.
- [ ] Only during the initial public offering period.
> **Explanation:** Stated value is an accounting measure and does not directly affect the stock’s market price, which is influenced by market dynamics and investor sentiment.
### What is the primary purpose of assigning a stated value to stocks?
- [ ] To restrict the stock trading activities
- [ ] To directly influence market prices
- [x] To simplify bookkeeping and financial reporting
- [ ] To increase stock liquidity
> **Explanation:** Assigning a stated value simplifies bookkeeping and financial reporting, providing a nominal value in the company's balance sheet.
### How is stated value recorded in the financial statements?
- [ ] As an asset under current assets
- [ ] As a liability
- [x] Under shareholders’ equity
- [ ] As a part of revenue
> **Explanation:** Stated value is recorded in the shareholders’ equity section of the balance sheet, representing the nominal value issued for accounting purposes.
### Can a company issue shares without a stated value?
- [x] Yes, some shares are issued as non-par value stock
- [ ] No, every share must have a stated value
- [ ] Only preferred shares can be issued without stated value
- [ ] It depends on market conditions
> **Explanation:** A company can issue shares without a stated value; these are often referred to as non-par value stocks.
### How often can a company change the stated value of its stocks?
- [ ] Annually
- [ ] Quarterly
- [ ] Monthly
- [x] Generally, it remains fixed post-establishment
> **Explanation:** Once assigned, the stated value generally remains fixed unless specific processes, including corporate board and regulatory approvals, are followed to change it.
### Who is responsible for setting the stated value of a corporation's stocks?
- [ ] Stock exchange regulators
- [ ] Shareholders through voting
- [ ] Market analysts
- [x] The corporation itself
> **Explanation:** The corporation sets the stated value internally, often decided during company formations or board resolutions.
### What key concept relates closely to stated value on a balance sheet?
- [ ] Current assets
- [ ] Market capitalization
- [x] Shareholders' equity
- [ ] Deferred revenue
> **Explanation:** Stated value is included under shareholders' equity on the balance sheet as part of the corporation's overall equity.
### What is one main difference between par value and stated value?
- [ ] Par value is lower than stated value
- [ ] Stated value affects the share market price, par value doesn't
- [x] Par value is a legal minimum issue price, while stated value is used for bookkeeping
- [ ] Only preferred stocks can have a par value
> **Explanation:** Par value traditionally serves as a legal minimum issue price, whereas stated value is primarily used for bookkeeping and accounting purposes.
### What happens when stocks sell for more than their stated value?
- [ ] The excess amount is recorded as a loss
- [x] The excess amount is recorded as additional paid-in capital
- [ ] It reduces the reserves of the company
- [ ] It impacts next year’s taxable income
> **Explanation:** When stocks sell for more than their stated value, the excess amount is recorded as additional paid-in capital (APIC) in the equity section of the balance sheet.
### Is it legally mandatory for companies to assign stated value to their stocks?
- [ ] Yes, for all kinds of stocks
- [ ] Only in certain jurisdictions
- [x] No, companies can issue non-par stocks
- [ ] Only for preferred stock
> **Explanation:** It is not a legal requirement; companies can choose to issue non-par value stocks, bypassing the need for stated value.
Thank you for exploring the concept of stated value with us and testing your understanding through our quizzes. Keep advancing your corporate finance knowledge!
