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Financing II: Stockholders’ Equity

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

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Financing II: Stockholders’ Equity

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  1. Financing II: Stockholders’ Equity Chapter 18 Spiceland See example excel files examples Earnings per share, stock options, etc.

  2. Topics: • Types of stock • Common • Preferred • treasury • Issuance of stock • Retained earnings • Dividends • Stock options

  3. Common Stock: • Residual Owners’ equity • Voting right (most important: election of directors) • May or may not receive dividends • May or may not have par value or stated value – depends on state corporate and tax law

  4. Common Stock Example: (Balance sheet presentation) Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding) $100,000 Additional paid in capital $900,000

  5. Preferred Stock Characteristics • High par value • No voting rights • Fixed dividends - Dividends cumulative • Liquidation preference over common stock • May be redeemable • May be convertible

  6. 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

  7. Treasury Stock: • Stock repurchased by the company with the intent to reissue it in the future • Reasons: • Stock options • Plan to acquire another company • Buy out dissident stockholder • Drive up stock price • Prevent take over

  8. Treasury Stock: • Contra stockholders’ equity account (debit balance) • Usually carried at cost (may be at par value)

  9. Treasury Stock Example: • Company repurchases 1,000 shares @ $25/share Dr. treasury stock 25,000 Cr. Cash 25,000 2. 700 shares are sold @ 15/share (stock option exercise) Dr. Cash 10,500 Dr. Additional paid in capital 7,000 Cr. Treasury stock 17,500

  10. Treasury Stock Example: Balance Sheet presentation: Common stock $1 par, 100,000 shares issued, 95,000 shares outstanding $100,000 Additional paid in capital $900,000 Less treasury stock, 5,000 shares at an average cost/share of $20(100,000)

  11. Retained Earnings • Ultimate residual owners’ equity account (ultimate plug figure) • Sum of the earnings since the company started • Minus the sum of dividends paid • Plus/minus other adjustments

  12. Dividends • Must be voted by the board of directors • Dividends on preferred stock first, only then can common stock receive dividends! • Cash dividends • Dividends in kind • Stock dividends

  13. Dividends • Result in reduction of retained earnings • Require expenditure of cash or other assets unless: • Stock dividends – also referred to as “capitalization of earnings”

  14. Cash Dividends Journal Entry: • 6/15 Dr. dividends $ 3,000 • Cr. dividends payable $ 3,000 • 6/30 Dr. dividends payable $ 3,000 • Cr. Cash $ 3,000 • 6/30 Dr. retained earnings $ 3,000 • Cr. Dividends $ 3,000

  15. B.S. Before Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 100,000 issued, 95,000 outstanding) $100,000 Additional paid in capital $900,000 Treasury stock 5,000 shares (100,000) Retained Earnings 1,200,000 Total Stockholders’ Equity 2,100,000

  16. Small Stock Dividend Journal Entry: • 6/15 Dr. retained earnings $ 200,000 • Cr. Common stock 10,000 • Cr. Paid in capital 190,000 • (issued a 10% stock dividend = 10,000 shares, market price/share: $20)

  17. B. S. After Small Stock Dividend: Common stock $1 par ($500,000 shares authorized, 110,000 issued, 104,500 outstanding) $ 110,000 Additional paid in capital 1,090,000 Treasury stock 5,500 shares (100,000) Retained Earnings 1,000,000 Total Stockholders’ Equity 2,100,000

  18. Large Stock Dividend Journal Entry: • 6/15 Dr. retained earnings $ 30,000 • Cr. Common stock 30,000 • (issued a 30% stock dividend = 30,000 shares, market price/share: $20)

  19. 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 900,000 Treasury stock 6,500 shares (100,000) Retained Earnings 1,170,000 Total Stockholders’ Equity 2,100,000

  20. Stock Split • Very large stock dividend • No journal entry, memo entry only to note new number of shares and new par value • 2 for 1 stock split, new # of shares issued = 200,000, new par value: $ .50/share

  21. 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 900,000 Treasury stock 10,000 shares (100,000) Retained Earnings 1,200,000 Total Stockholders’ Equity 2,100,000

  22. Reverse Stock Split • Market 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.

  23. Comprehensive Income • Items whose market value (MV) has changed and that may affect equity but have not yet been realized • Realized: Cash received (promise recognized) or paid (liability recognized) i.e., earned. • Change in MV: E.g., MV of stock investments has in(de)creased

  24. Included in Comprehensive Income: • Unrealized holding gains (losses) from • Stock investments • Changes (amendments) of post retirement benefit plans • Foreign currency translation • Derivatives Note: All items reported net of related tax effect.

  25. Reporting of Comprehensive Income • Two 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

  26. 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

  27. Quasi – Reorganization I • A reorganization of the balance sheet generally in conjunction with a court adjudicated bankruptcy (Chapter 11) • Objective: Fresh start for the company • Revaluation (up or down) of assets (maybe liabilities) to market value • Elimination of retained earnings deficit

  28. Quasi – Reorganization II • Revalued Assets and liabilities • Zero Retained Earnings • Contributed Capital adjusted to balance • This may require elimination of APIC and • Reduction of common stock par value

  29. Quasi – Reorganization III Example: Before After Assets 250 260 Liabilities 220 220 Common Stock 190 40 R/E -160 0 Total Equity 250 260

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