Chapter 10 Stockholders Equity McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies,...
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Transcript of Chapter 10 Stockholders Equity McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies,...
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Chapter 10
Stockholders’ Equity
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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Stockholders’ Equity
Stockholders’ Equity = Assets - LiabilitiesStockholders’ Equity = Assets - Liabilities
Primary Sections of Stockholders’ Equity
Paid-in capital Retained Earnings Treasury Stock
Amount stockholders have
invested in the corporation
Amount of earnings the corporation has
retained
Corporation’s own stock that it has
reacquired
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Part A
Invested Capital
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LO1 Corporations
o Articles of incorporation (or corporate charter) describe
a) the nature of the firm’s business activities
b) the shares to be issued
c) the initial board of directors
o Corporation’s stockholders control the corporation - By voting their shares, they determine the makeup of the board of directors - which in turn appoints the management to run the corporation.
o Articles of incorporation (or corporate charter) describe
a) the nature of the firm’s business activities
b) the shares to be issued
c) the initial board of directors
o Corporation’s stockholders control the corporation - By voting their shares, they determine the makeup of the board of directors - which in turn appoints the management to run the corporation.
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Public or Private
Stocks trade on a stock exchanges such as NYSE, AMEX, NASDAQ; or by over-the-counter (OTC) trading.
Regulated by the Securities and Exchange Commission (SEC)
Examples – Wal-Mart, Microsoft, Intel
Does not allow investment by the general public and has fewer stockholders
Not regulated by the Securities and Exchange Commission (SEC) and do not need to file financial statements with it
Examples - Cargill (agricultural commodities) Koch Industries (oil and gas), Chrysler (cars)
Corporations may be either public or private
Public Private
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Advantages and Disadvantages of a Corporation
Additional taxes
More paperwork
Limited liability
Ability to raise capital
Lack of mutual agency
Advantages Disadvantages
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LO2 Common Stock
Type of Stock Definition Authorized Shares available to sell
(issued and unissued) Issued Shares actually sold
(includes treasury stock) Outstanding Shares held by investors
(excludes treasury stock)Authorized – Unissued = Issued
Issued – Treasury Stock = Outstanding
o If a corporation has only one kind of stock, it usually is labeled as common stock.
o If a corporation has only one kind of stock, it usually is labeled as common stock.
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LO3 Preferred Stock
Usually have first rights to a specified amount of Dividends. Receive preference over common stockholders in the
distribution of assets in the event the corporation is dissolved.
Usually have first rights to a specified amount of Dividends. Receive preference over common stockholders in the
distribution of assets in the event the corporation is dissolved.
FactorCommon
StockPreferred
Stock Bonds
Voting rights Yes Usually No No
Risk to the investor Highest Middle Lowest
Expected return to the investor
Highest Middle Lowest
Risk of contract violations Lowest Middle Highest
Preference for payments Lowest Middle Highest
Tax deductibility of payments No Usually No Yes
Comparison of common stock, preferred stock, and bonds
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Features of Preferred Stock
Flexibility allowed in its contractual provisions
Convertible Redeemable Cumulative
Shares can be exchanged for common stock
Shares can be returned to the corporation at a
fixed price
Shares receive priority for future
dividends, if dividends are not
paid in a given year
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LO4 Treasury Stock
Why corporations repurchase their stock To boost under-priced stock. To distribute surplus cash without paying
dividends. To boost earnings per share. To offset issuance of shares under stock-
based compensation plans.
Why corporations repurchase their stock To boost under-priced stock. To distribute surplus cash without paying
dividends. To boost earnings per share. To offset issuance of shares under stock-
based compensation plans.
A corporation’s own stock that it has reacquired
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Part B
Earned Capital
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LO5 Retained Earnings and Dividends
RETAINED EARNINGS
o Represents the earnings retained in the corporation – earnings not paid out as dividends to stockholders.
o Equals all net income, less all dividends, since the corporation began.
o Has a normal credit balance consistent with other stockholders’ equity accounts.
o If losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit.
o Represents the earnings retained in the corporation – earnings not paid out as dividends to stockholders.
o Equals all net income, less all dividends, since the corporation began.
o Has a normal credit balance consistent with other stockholders’ equity accounts.
o If losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit.
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LO6 Stock Dividends and Stock Splits
Sometimes, corporations distribute to shareholders additional shares of the companies’ own stock rather than cash. These are known as stock dividends or stock splits depending on
the size of the stock distribution.
You own 100 shares and assume a
You will get
10% stock dividend 10 additional shares
20% stock dividend 20 additional shares
100% stock dividend 100 additional shares
Small stock dividend
Large stock dividend or stock split (2-for-1)
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Part C
Reporting and Analyzing Stockholders’ Equity
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LO8 Equity Analysis
Equity Analysis
Return on Equity
Return on the Market Value of Equity
Price-Earnings Ratio
Earnings Per Share
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End of chapter 10
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