copyright © 2011 by the mcgraw-hill companies, inc. all rights reserved.mcgraw-hill/irwin

Chapter 11

Reporting and Interpreting Stockholders’ Equity

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIAFred Phillips, Ph.D., CA

Learning Objective 1

Explain the role of stock in financing a corporation

11-3

Corporate OwnershipThe major advantage of the corporate form of business

is the ease of raising capital as both large and small investors can participate in corporate ownership.

Simple to become an

owner

Easy to transfer

ownership

Provides limited liability

Because a corporation is a separate legal entity, it can Own assets. Incur liabilities. Sue and be sued. Enter into contracts.

11-4

Voting rights.

Dividends.

Residual claims.StockholderBenefits

Corporate Ownership

Preemptive rights.

11-5

Vice President(Production)

V ice President(M arketing)

V ice President(F inance)

V ice President(Personnel)

President

B oard of D irectors

Stockholders(O w ners of voting shares)

Corporate Ownership

11-6

Equity Versus Debt Financing

Advantages of equity

• Equity does not have to be repaid.

• Dividends are optional.

Advantages of debt

• Interest on debt is tax deductible.

• Debt does not change stockholder control.

Advantages of equity and debt financing.Advantages of equity and debt financing.

11-7


Explain and analyze common stock transactions.

11-8

Two primary sources of Stockholders’ Equity

Common Stock Transactions

Contributed Capital

CommonStock

Additional Paid-in Capital

Retained Earnings

11-9

Authorization, Issuance, and Repurchase of Stock

The maximum number of shares of capital stock that can be

issued to the public.

Issued shares are authorized shares of stock that have been

distributed to stockholders.

Unissued shares of stock are

shares that have never

been distributed to stockholders.

UnissuedShares

TreasuryShares

OutstandingShares

Treasury shares are issued shares that have been reacquired by the

corporation.

Outstanding shares are issued shares that are

owned by stockholders.

AuthorizedShares

11-10

Authorization, Issuance, and Repurchase of Stock

11-11

Par value is typically a very nominal amount such a $0.01

per share.

Stock Authorization

Par value is an arbitrary amount assigned to each

share of stock when it is authorized.

Par value is an arbitrary amount assigned to each

share of stock when it is authorized.

Market price is the amount that each

share of stock will sell for in the market.

11-12

Some states do not

require a par value to be

stated in the charter.

No-par Stock

Stock Authorization

11-13

Stock Issuance

Initial public offering (IPO)

The first time a corporation issues stock to the public.

Seasoned new issue

Subsequent issues of new stock to the

public.

National Beverage

issues stock.

11-14

Most issues of stock to the public are cash transactions.Most issues of stock to the public are cash transactions.

Stock Issuance

National Beverage issued 100,000 shares ofNational Beverage issued 100,000 shares of$0.01 par value common stock for $10 per share.$0.01 par value common stock for $10 per share.

1 Analyze

Record2

11-15

Stock Exchanged between Investors

Transactions between two investors do not affect the corporation’s accounting records.

I’d like to sell 100 shares of National Beverage stock.

I’d like to buy 100 shares of National

Beverage stock.

11-16

Repurchase of Stock

A corporation repurchases its stock to:

Send a signal that the company believes its stock is undervalued.

Obtain shares to reissue for the purchase of other companies.

Obtain shares to reissue to employees as part of stock purchase or stock option plans.

Treasury StockTreasury Stock

11-17

Repurchase of StockNational Beverage

repurchases its own stock

(Treasury stock)

Stockholders

Stock options allow employees to purchase

stock from the corporation at a fraction of the stock’s

market price.

Employee

Employee compensation

package includes salary plus stock

options.

11-18

No voting or

dividend rights

Contra equity

account

When stock is reacquired, the corporation records the treasury stock at cost.

Treasury stock is not

an asset.

Repurchase of Stock

11-19

National Beverage reacquired 50,000 sharesNational Beverage reacquired 50,000 sharesof its common stock at $25 per share.of its common stock at $25 per share.

Repurchase of Stock

1 Analyze

Record2

11-20

Reissuance of Treasury Stock

National Beverage reissued 5,000 sharesNational Beverage reissued 5,000 sharesof the Treasury Stock at $26 per share. of the Treasury Stock at $26 per share.

No profit or loss is recognized on treasury stock transactions.

1 Analyze

Record2

11-21


Explain and analyze cash dividends, stock dividends, and stock split transactions.

11-22

Dividends on Common Stock

Declared by board of directors.

Not legally required.

Creates liability at declaration.

Requires sufficient Retained Earnings and Cash.

11-23

If I loan your company $1,000,000,I will want you to restrict your

retained earnings to limit dividend payments.

Restrictions on Retained Earnings

Loan agreements can include restrictions on paying dividends below a certain

amount of retained earnings.

Loan agreements can include restrictions on paying dividends below a certain

amount of retained earnings.

11-24

Dividends Dates

11-25

Dividends Dates

National Beverage declares an $0.80 dividend on each shareNational Beverage declares an $0.80 dividend on each share of its 46,000,000 shares of common stock outstanding. of its 46,000,000 shares of common stock outstanding.

1 Analyze

Record2

11-26

Dividends Dates

National Beverage paid the previously declared $0.80National Beverage paid the previously declared $0.80dividend on its shares of common stock outstanding.dividend on its shares of common stock outstanding.

1 Analyze

Record2

11-27

No change in total stockholders’ equity.

No change inpar values.

All stockholders retain same percentage ownership.

Stock Dividends

Corporations issue stock dividends to:

Remind stockholders of the accumulating wealth in the company.

Reduce the market price per share of stock.

Signal that the company expects strong financial performance in the future.

Distribution of additional sharesof stock to stockholders.

11-28

Record at currentmarket value

of stock.

Record atpar valueof stock.

Small Large

The journal entry moves an amount fromRetained Earnings to other equity accounts.

Stock Dividends

Stock dividend > 20 – 25%Stock dividend < 20 – 25%

11-29

National Beverage issued a 20 percent stock dividend on National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock common stock and accounted for it as a large stock

dividend.dividend.

Stock Dividends

1 Analyze

Record2

11-30

Stock Splits

An increase in the number of shares and a corresponding decreasein par value per share. Retained earnings is not affected.

A stock split creates more pieces of the same pie.

Assume that a corporation had 5,000 shares of $1 par value common stock outstanding before a 2–for–1 stock split.

Before Split

After Split

Common Stock Shares 5,000

Par Value per Share 1.00$ Total Par Value 5,000$ 5,000$

Increase

Decrease

No Change

Before Split

After Split

Common Stock Shares 5,000 10,000

Par Value per Share 1.00$ 0.50$ Total Par Value 5,000$ 5,000$

11-31

Comparison of Distributionsto Stockholders

2-for-1 Stock 100% Stock $10,000 CashStockholders' Equity Before Split Dividend DividendContributed Capital

Number of common sharesoutstanding 1,000,000

Par value per common share 0.01$ Common stock, at par 10,000$ Additional paid-in capital 30,000 Retained Earnings 650,000

Total stockholders' equity 690,000$

After2-for-1 Stock 100% Stock $10,000 Cash

Stockholders' Equity Before Split Dividend DividendContributed Capital

Number of common sharesoutstanding 1,000,000

Par value per common share 0.01$ Common stock, at par 10,000$ Additional paid-in capital 30,000 Retained Earnings 650,000

Total stockholders' equity 690,000$

After


Number of common sharesoutstanding 1,000,000 2,000,000

Par value per common share 0.01$ 0.005$ Common stock, at par 10,000$ 10,000$ Additional paid-in capital 30,000 30,000 Retained Earnings 650,000 650,000

Total stockholders' equity 690,000$ 690,000$



Number of common sharesoutstanding 1,000,000 2,000,000

Par value per common share 0.01$ 0.005$ Common stock, at par 10,000$ 10,000$ Additional paid-in capital 30,000 30,000 Retained Earnings 650,000 650,000

Total stockholders' equity 690,000$ 690,000$

After


Number of common sharesoutstanding 1,000,000 2,000,000 2,000,000

Par value per common share 0.01$ 0.005$ 0.01$ Common stock, at par 10,000$ 10,000$ 20,000$ Additional paid-in capital 30,000 30,000 30,000 Retained Earnings 650,000 650,000 640,000

Total stockholders' equity 690,000$ 690,000$ 690,000$



Number of common sharesoutstanding 1,000,000 2,000,000 2,000,000

Par value per common share 0.01$ 0.005$ 0.01$ Common stock, at par 10,000$ 10,000$ 20,000$ Additional paid-in capital 30,000 30,000 30,000 Retained Earnings 650,000 650,000 640,000

Total stockholders' equity 690,000$ 690,000$ 690,000$

After


Number of common sharesoutstanding 1,000,000 2,000,000 2,000,000 1,000,000

Par value per common share 0.01$ 0.005$ 0.01$ 0.01$ Common stock, at par 10,000$ 10,000$ 20,000$ 10,000$ Additional paid-in capital 30,000 30,000 30,000 30,000 Retained Earnings 650,000 650,000 640,000 640,000

Total stockholders' equity 690,000$ 690,000$ 690,000$ 680,000$



Number of common sharesoutstanding 1,000,000 2,000,000 2,000,000 1,000,000

Par value per common share 0.01$ 0.005$ 0.01$ 0.01$ Common stock, at par 10,000$ 10,000$ 20,000$ 10,000$ Additional paid-in capital 30,000 30,000 30,000 30,000 Retained Earnings 650,000 650,000 640,000 640,000

Total stockholders' equity 690,000$ 690,000$ 690,000$ 680,000$

After

11-32


Describe the characteristics of preferred stock and analyze

transactions affecting preferred stock.

11-33

Preferred Stock Issuance

National Beverage issued 10,000 shares of itsNational Beverage issued 10,000 shares of its$1 par value preferred stock for $5 per share.$1 par value preferred stock for $5 per share.

1 Analyze

Record2

Usually has no voting rights

Usually has a fixed dividend ratePreferred Stock

Priority over common stock

11-34

Preferred Stock Dividends

• Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.

• Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

If the preferred stock is noncumulative, any dividends not declared in previous years are lost

permanently.

11-35

In addition to its common stock, National Beverage has $1 par value cumulative preferred stock with a 7

percent dividend rate. Assume 100,000 of these shares are outstanding, one year of dividends are in

arrears, and the board of directors just declared total dividends of $400,000.

How much will each class of stock receive?


11-36

Total dividend declared 400,000$

Preferred stock (cumulative)In ArrearsCurrent Yr.

Remainder

Common stock

Remainder



Preferred stock (cumulative)In Arrears ($1 par × 7% × 100,000 shares) 7,000$ Current Yr.

Remainder

Common stock

Remainder


Preferred stock (cumulative)In Arrears ($1 par × 7% × 100,000 shares) 7,000$ Current Yr. ($1 par × 7% × 100,000 shares) 7,000 14,000

Remainder 386,000$

Common stock 386,000

Remainder -$

11-37

Retained EarningsTotal cumulative amount of reported net income less any

net losses and dividends declared since the company started operating.

Baker Company incurred a loss of $120,000 in 2009 thatresulted in an Accumulated Deficit in Retained Earnings.

11-38


Analyze the earnings per share (EPS), return on equity

(ROE), and price/earnings (P/E) ratios.

11-39

Net Income

Average Number of Common Shares OutstandingEPS =

National Beverage’s income for 2008 was $22,500,000 and the average number of shares

outstanding during the year was 45,900,000.

Earnings per share is probably the single most widely watched financial ratio.

Earnings Per Share (EPS)

$22,500,000

45,900,000 SharesEPS = = $0.49 per share

11-40

Return on Equity (ROE)

Net Income

Average Stockholders’ EquityROE =

National Beverage’s income for 2008 was $22,500,000 and the average Stockholders’

Equity was $151,000,000.

Return on equity is the amount earned for each dollar invested by stockholders.

$22,500,000

$151,000,000ROE = = 14.9 percent

11-41

Price/Earnings (P/E) Ratio

Current Stock Price (per share)

Earnings Per Share (annual)P/E =

The P/E ratio is a measure of the value that investors place on a company’s common stock.

National Beverage’s stock price was $7.74 whenthe company reported its 2008 EPS of $0.49.

$ 7.74

$ 0.49P/E = = 15.8

11-42

Comparison of EPS, ROE,and P/E Ratios

EPS ROE P/ENational Beverage 0.49$ 14.9% 15.8

Pepsico 3.26$ 34.8% 16.0

2008EPS ROE P/E

National Beverage 0.49$ 14.9% 15.8

Pepsico 3.26$ 34.8% 16.0

2008

11-43

Supplement 11A

Owners’ Equity for Other Forms of Business

Owner’s Equity for a Sole Proprietorship

Only two owner’sequity accounts.

A withdrawal accountto record the owner’swithdrawals of assets.

A capital account to recordthe owner’s investmentsand the periodic income

or loss.

Closed to the capital accountClosed to the capital accountat the end of each period.at the end of each period.

No separate retainedNo separate retainedearnings account.earnings account.

11-45

Accounting for Owner’s Equityfor a Sole ProprietorshipTo record a $150,000 investment by H. Simpson, the owner.To record a $150,000 investment by H. Simpson, the owner.

To record H. Simpson’s $1,000 monthly withdrawal.To record H. Simpson’s $1,000 monthly withdrawal.

11-46

Accounting for Owner’s Equityfor a Sole Proprietorship

To close revenue and expense accounts to capital.To close revenue and expense accounts to capital.

To close the $1,000 monthly drawings to capital.To close the $1,000 monthly drawings to capital.

11-47

Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as

any other form of business.

Accounting for partners’ equity follows the same pattern as for a sole proprietorship.

Separate capital and drawings accounts are maintained for each partner.

Accounting for Partnership Equity

11-48


To record investments by partners Able and BakerTo record investments by partners Able and Bakerwho will divide net income as follows: Able, 60who will divide net income as follows: Able, 60

percent and Baker 40 percent.percent and Baker 40 percent.

To record the partners’ monthly withdrawal.To record the partners’ monthly withdrawal.

11-49


To close revenue and expense accounts to partners’ capital.To close revenue and expense accounts to partners’ capital.

To close the monthly drawings to partners’ capital.To close the monthly drawings to partners’ capital.

11-50

Other Business Forms

Limited Liability

Partnership(LLP)

• Protects innocent partners from malpractice or negligence claims.

• Most states hold all partners personally liable for partnership debts.

11-51

Chapter 11Solved Exercises

M11-4, M11-8, E11-3, E11-6, E11-8, E11-11, E11-20

M11-4 Analyzing and Recording the Issuance of Common StockTo expand operations, Aragon Consulting issued 100,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $75 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.

Assets = Liabilities + Stockholders' EquityCash + 7,500,000 Common Stock + 100,000

Additional Paid-in Capital + 7,400,000

Analyze1

dr Cash (+A) 7,500,000 cr Common Stock (+SE) 100,000 cr Additional Paid-in Capital (+SE) 7,400,000

Record2

11-53

M11-4 Analyzing and Recording the Issuance of Common StockWould your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.

Assets = Liabilities + Stockholders' EquityCash + 7,500,000 Common Stock + 200,000

Additional Paid-in Capital + 7,300,000

Analyze1

dr Cash (+A) 7,500,000 cr Common Stock (+SE) 200,000 cr Additional Paid-in Capital (+SE) 7,300,000

Record2

The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ.

11-54

M11-8 Determining the Amount of a DividendNetpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of 50 cents per share of common stock. What is the total amount of the dividend that will be paid?

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued 270,000 Less treasury stock 100,000 Shares outstanding 170,000 Dividend per share × 0.50$ Total dividends paid 85,000$

11-55

E11-3 Preparing the Stockholders’ Equity Section of the Balance SheetNorth Wind Aviation received its charter during January 2010. The charter authorized the following capital stock:

During 2010, the following transactions occurred in the order given:a. Issued a total of 40,000 shares of the common stock to the company’s founders for $11 per share.b. Issued 5,000 shares of the preferred stock at $18 per share.c. Issued 3,000 shares of the common stock at $14 per share and 1,000 shares of the preferred stock at $28.d. Net income for the first year was $48,000.Required:Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.

11-56

E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet

5,000 shares × ($18 – $10) + 1,000 shares × ($28 – $10)

40,000 shares × ($11 – $7) + 3,000 shares × ($14 – $7)

11-57

E11-6 Recording and Reporting Stockholders’ Equity TransactionsAvA School of Learning obtained a charter at the start of 2010 that authorized 50,000 shares of no-par common stock and 20,000 shares of preferred stock, par value $10. During 2010, the following selected transactions occurred:a. Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.b. Issued 6,000 shares of common stock to an outside investor at $40 cash per share.c. Issued 8,000 shares of preferred stock at $20 cash per share.Required:1. Give the journal entries indicated for each of these transactions.2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2010. At the end of 2010, the accounts reflected net income of $36,000. No dividends were declared.

11-58

E11-6 Recording and Reporting Stockholders’ Equity Transactions

Required:1. Give the journal entries indicated for each of these transactions.

(a) Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.

dr Cash (+A) (5,000 × $40 × 4) 800,000 cr Common Stock (+SE) 800,000

(b) Issued 6,000 shares of common stock to an outside investor at $40 cash per share.

dr Cash (+A) (6,000 × $40) 240,000 cr Common Stock (+SE) 240,000

11-59

E11-6 Recording and Reporting Stockholders’ Equity Transactions

Required:1. Give the journal entries indicated for each of these transactions.

(c) Issued 8,000 shares of preferred stock at $20 cash per share.

dr Cash (+A) (8,000 × $20) 160,000 cr Preferred Stock (+SE) 80,000 cr Additional Paid-in Capital, Preferred (+SE) 80,000

11-60

E11-6 Recording and Reporting Stockholders’ Equity TransactionsRequired:2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2010. At the end of 2010, the accounts reflected net income of $36,000. No dividends were declared.

8,000 shares × ($20 – $10)

(20,000 shares × $40) + (6,000 shares × ($40)

11-61

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactDuring 2010, the following selected transactions affecting stockholders’ equity occurred for Corner Corporation:Feb. 1 Purchased 400 shares of the company’s own common stock at $22 cash per share.Jul. 15 Issued 100 of the shares purchased on February 1, 2010, for $24 cash per share.Sept. 1 Issued 60 more of the shares purchased on February 1, 2010, for $20 cash per share.Required:1. Show the effects of each transaction on the accounting equation.2. Give the indicated journal entries for each of the transactions.3. What impact does the purchase of treasury stock have on dividends paid?4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

11-62

Analyze1

Date Assets = Liabilities + Stockholders' EquityFeb. 1 Cash - 8,800 Treasury Stock (+xSE) - 8,800

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:1. Show the effects of each transaction on the accounting equation.


Jul, 15 Cash + 2,400 Treasury Stock (-xSE) + 2,200Additional Paid-in Capital – treasury + 200


Jul, 15 Cash + 2,400 Treasury Stock (-xSE) + 2,200Additional Paid-in Capital – treasury + 200

Sept. 1 Cash + 1,200 Treasury Stock (-xSE) + 1,320Additional Paid-in Capital – treasury - 120

11-63

E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact

Required:2. Give the indicated journal entries for each of the transactions.

dr Cash (+A) (100 × $24) 2,400 cr Treasury Stock (-xSE) (+SE) (100 × $22) 2,200 cr Additional Paid-in Capital – Treaasury (+SE) 200

Record July 152

dr Cash (+A) (60 × $20) 1,200 dr Additional Paid-in Capital – Treaasury (-SE) 120 cr Treasury Stock (-xSE) (+SE) (60 × $22) 1,320

Record Sept. 12

dr Treasury Stock (+xSE) (-SE) 8,800 cr Cash (-A) (400 × $22) 8,800

Record Feb. 12

11-64

E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:3. What impact does the purchase of treasury stock have on dividends paid?

4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?

Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased.

The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance

sheet accounts.

11-65

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained EarningsThe 2009 annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $119.9 million in 2009. It also declared and paid dividends on common stock in the amount of $2 per share. During 2009, Sneer had 1,000,000,000 shares of common authorized; 387,570,300 shares had been issued; 41,670,300 shares were in treasury stock. The balance in Retained Earnings was $1,554 million on December 31, 2008, and 2009 Net Income was $858 million.Required:1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.2. Using the information given above, prepare a statement of retained earnings for the year ended December 31, 2009.

11-66

E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings

1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.

a. Preferred Stock

dr Dividends Declared (-SE) 119,900,000 cr Dividends Payable (+L) 119,900,000

Declaration

dr Dividends Payable (-L) 119,900,000 cr Cash (-A) 119,900,000

Payment

11-67



b. Common Stock

Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.

Shares issued 387,570,300 Less Treasury Stock 41,670,300 Shares outstanding 345,900,000 Dividend per share × 2.00$ Total dividends paid 691,800,000$

11-68



b. Common Stock

dr Dividends Declared (-SE) 691,800,000 cr Dividends Payable (+L) 691,800,000

Declaration

dr Dividends Payable (-L) 691,800,000 cr Cash (-A) 691,800,000

Payment

11-69


2. Using the information given above, prepare a statement of retained earnings for the year ended December 31, 2009.

11-70

E11-20 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2010.

During the quarter ended March 31, 2010, SPI reported Net Income of $5,000 and declared and paid cash dividends totaling $5,000.Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2010.

Net Income

Average Number of Common Shares OutstandingEPS =

$5,000

50,000 SharesEPS = = $0.10 per share

11-71

E11-20 Determining the Effect of a Stock Repurchase on EPS and ROE

Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2010.

Net Income

Average Stockholders’ EquityROE =

$5,000

$100,000ROE = = 5.0 percent

11-72


Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2010. Also assume that during the quarter ended June 30, 2010, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2010.

$5,000

40,000 SharesEPS = = $0.125 per share

If 10,000 shares are repurchased on April 1, 2010, only 40,000shares would be outstanding from April 1 – June 30, 2010.

11-73

$5,000

$80,000ROE = = 6.25 percent

10,000 shares are repurchased for $20,000 on April 1, 2010, resulting in a Stockholders’ Equity balance of $80,000 from

April 1 – June 30, 2010.


Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2010. Also assume that during the quarter ended June 30, 2010, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2010.

11-74

E11-20 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2010.

Required:3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a stock repurchase on EPS and ROE?

By repurchasing stock, a company can increase both its EPS and ROE.

11-75

End of Chapter 11

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Documents

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