2 Responses to “What is the difference between new common stock and internal common equity?”

1. Adam M on March 1st, 2009 1:37 pm
   

   Retained earnings are proto-dividends, that is to say, dividends which have yet to be paid to investors. To link that with the term “internal common equity”: this is equity that the company has built, but which it holds onto until such time as it is disbursed in the form of dividends. New common stock is a reference to the instrument by which a company raises funds which entails selling the stock to someone for whatever issue price.

   So, retained earnings are little bits of money that the company holds onto until such time it is disbursed and are generated by company profits, and new common stock is basically a voucher for the rights to a bit of the company and its future earnings (which will be stored in and paid out of the retained earnings account) which the company sells in order to raise capital.
2. iam_an_elf_archer on March 3rd, 2009 9:33 pm
   

   Adam did a great job telling u about it. I’ll add just one more thing; transferring retained earnings into common shares by means of stock dividends (capital increase) does not dilute the existing shareholders’ stakes. Everyone’s percentage ownership stays exactly the same. An issuance of new equity, however, would bring new players and new funds into the game.

   Sometimes the decision to raise new equity is economically wrong. i.e., when the ex post earnings per share decrease to the detriment of original owners. This is why CFO’s hesitate to do it.

   New equity is the least favorable source of funding a company may consider. Conventional wisdom says retained earnings come first followed by debt.

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