Financing II: Stockholders’ Equity

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Financing II: Stockholders Equity. Chapter 18 Spiceland See example excel files examples Earnings per share, stock options, etc. Topics:. Types of stock Common Preferred treasury Issuance of stock Retained earnings Dividends Stock options. Common Stock:. Residual Owners equity - PowerPoint PPT Presentation

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<ul><li><p>Financing II: Stockholders Equity Chapter 18 SpicelandSee example excel files examples Earnings per share, stock options, etc. </p></li><li><p>Topics:Types of stockCommonPreferredtreasuryIssuance of stockRetained earningsDividendsStock options</p></li><li><p>Common Stock:Residual Owners equityVoting right (most important: election of directors)May or may not receive dividendsMay or may not have par value or stated value depends on state corporate and tax law</p></li><li><p>Common Stock Example: (Balance sheet presentation)</p><p>Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding)$100,000Additional paid in capital$900,000</p></li><li><p>Preferred Stock CharacteristicsHigh par value No voting rightsFixed dividends - Dividends cumulativeLiquidation preference over common stock May be redeemableMay be convertible</p></li><li><p>Preferred Stock Example:Balance sheet presentation:Preferred stock, $100 par, 8% cumulative, convertible into 25 shares of common stock Issued and outstanding 2,000 shares $200,000</p></li><li><p>Treasury Stock:Stock repurchased by the company with the intent to reissue it in the futureReasons:Stock optionsPlan to acquire another companyBuy out dissident stockholderDrive up stock pricePrevent take over</p></li><li><p>Treasury Stock:Contra stockholders equity account (debit balance)Usually carried at cost (may be at par value)</p></li><li><p>Treasury Stock Example:Company repurchases 1,000 shares @ $25/share Dr. treasury stock25,000 Cr. Cash25,0002. 700 shares are sold @ 15/share (stock option exercise)Dr. Cash 10,500Dr. Additional paid in capital 7,000 Cr. Treasury stock 17,500</p></li><li><p>Treasury Stock Example:Balance Sheet presentation:</p><p>Common stock $1 par, 100,000 shares issued, 95,000 shares outstanding$100,000Additional paid in capital$900,000Less treasury stock, 5,000 sharesat an average cost/share of $20 (100,000)</p></li><li><p>Retained EarningsUltimate residual owners equity account (ultimate plug figure)Sum of the earnings since the company startedMinus the sum of dividends paid Plus/minus other adjustments</p></li><li><p>DividendsMust be voted by the board of directorsDividends on preferred stock first, only then can common stock receive dividends! Cash dividendsDividends in kindStock dividends</p></li><li><p>DividendsResult in reduction of retained earningsRequire expenditure of cash or other assets unless: Stock dividends also referred to as capitalization of earnings </p></li><li><p>Cash Dividends Journal Entry:6/15 Dr. dividends$ 3,000 Cr. dividends payable $ 3,0006/30 Dr. dividends payable$ 3,000 Cr. Cash $ 3,0006/30 Dr. retained earnings$ 3,000 Cr. Dividends $ 3,000 </p></li><li><p>B.S. Before Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding)$100,000Additional paid in capital$900,000Treasury stock 5,000 shares (100,000)Retained Earnings 1,200,000Total Stockholders Equity 2,100,000</p></li><li><p>Small Stock Dividend Journal Entry:6/15 Dr. retained earnings $ 200,000 Cr. Common stock 10,000 Cr. Paid in capital 190,000</p><p>(issued a 10% stock dividend = 10,000 shares, market price/share: $20)</p></li><li><p>B. S. After Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 110,000 issued, 104,500 outstanding) $ 110,000Additional paid in capital 1,090,000Treasury stock 5,500 shares(100,000)Retained Earnings1,000,000Total Stockholders Equity 2,100,000</p></li><li><p>Large Stock Dividend Journal Entry:6/15 Dr. retained earnings $ 30,000 Cr. Common stock 30,000 </p><p>(issued a 30% stock dividend = 30,000 shares, market price/share: $20)</p></li><li><p>B. S. After Large Stock Dividend: Common stock $1 par ($500,000 shares authorized, 130,000 issued, 123,500 outstanding) $ 130,000 Additional paid in capital 900,000Treasury stock 6,500 shares (100,000)Retained Earnings1,170,000Total Stockholders Equity 2,100,000</p></li><li><p>Stock SplitVery large stock dividendNo journal entry, memo entry only to note new number of shares and new par value </p><p>2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share </p></li><li><p>Balance Sheet After Stock Split: Common stock $ .50 par (1,000,000 shares authorized, 200,000 issued, 190,000 outstanding) $ 100,000 Additional paid in capital 900,000Treasury stock 10,000 shares (100,000)Retained Earnings1,200,000Total Stockholders Equity 2,100,000</p></li><li><p>Reverse Stock SplitMarket price of stock falls too low Companies sometimes try to improve the appearance or prevent delisting from a stock exchange by issuing a reverse split: I.e., for every 5 old shares stockholders receive 1 new share. </p></li><li><p>Comprehensive IncomeItems whose market value (MV) has changed and that may affect equity but have not yet been realizedRealized: Cash received (promise recognized) or paid (liability recognized) i.e., earned.Change in MV: E.g., MV of stock investments has in(de)creased</p></li><li><p>Included in Comprehensive Income:Unrealized holding gains (losses) fromStock investmentsChanges (amendments) of post retirement benefit plansForeign currency translationDerivativesNote: All items reported net of related tax effect.</p></li><li><p>Reporting of Comprehensive IncomeTwo possibilities:Right after net income (Income Statement)OR:Separate section in the footnotes. Again it starts with Net Income Ends with Comprehensive income for the period</p></li><li><p>Accumulated Other Comprehensive Income (AOCI)Shown on the balance sheet (component of owners equity)Consists of as the heading says, all OCI (gains (losses) since company started to recognize it</p></li><li><p>Quasi Reorganization IA reorganization of the balance sheet generally in conjunction with a court adjudicated bankruptcy (Chapter 11)Objective: Fresh start for the companyRevaluation (up or down) of assets (maybe liabilities) to market valueElimination of retained earnings deficit </p></li><li><p>Quasi Reorganization IIRevalued Assets and liabilitiesZero Retained EarningsContributed Capital adjusted to balanceThis may require elimination of APIC and Reduction of common stock par value</p></li><li><p>Quasi Reorganization IIIExample:BeforeAfterAssets250260Liabilities 220220Common Stock 190 40R/E-160 0Total Equity250260</p></li></ul>

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