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Shareholders’ Equity

Shareholders’ Equity. Chapter 9. ( In thousands of U.S. dollars). June 30 2002 2001. Preferred shares, unlimited number shares authorized; shares issued and outstanding; 2002 and 2001, none – – Common shares, an unlimited number authorized:

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Shareholders’ Equity

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  1. Shareholders’ Equity Chapter 9

  2. (In thousands of U.S. dollars) June 30 2002 2001 Preferred shares, unlimited number shares authorized; shares issued and outstanding; 2002 and 2001, none – – Common shares, an unlimited number authorized: 2002; 47,255,062 shares issued and outstanding 2001; 44,026,394 shares issued and outstanding $453,299 $400,262 Intrawest Corporation Shareholders’ Equity

  3. Intrawest Corporation Shareholders’ Equity (In thousands of U.S. dollars) June 30 2002 2001 Retained earnings 241,665 187,922 Foreign currency translation adjustment (31,295)(33,780) Total shareholders’ equity $ 667,269$568,362

  4. Learning Objective 1 Explain the advantages and disadvantages of a corporation.

  5. What is the Best Way toOrganize a Business? Proprietorship Partnership Corporation

  6. Characteristics of a Corporation Separate legal entity Continuous life and transferability of ownership Limited liability Separation of ownership and management Corporate taxation Government regulation

  7. Advantages 1. Can raise more capital than a proprietorship or partnership can 2. Continuous life 3. Ease of transferring ownership 4. Limited liability of shareholders Disadvantages 1. Separation of ownership 2. Corporate taxation 3. Government regulation Advantages and Disadvantagesof a Corporation

  8. obtain Organizing a Corporation Articles of Incorporation Incorporators Set bylaws

  9. Authority Structureof a Corporation Shareholders Board of Directors Chairperson of the Board President

  10. VP Sales VP Manufacturing CFO VP Personnel Secretary Controller (Accounting Officer) Treasurer (Finance Officer) Authority Structureof a Corporation President

  11. Shareholders’ Rights The right to sell shares Vote Dividends Liquidation Preemption

  12. Shareholders’ Equity Owners’ equity in a corporation has two main components: Contributed capital Retained earnings

  13. Capital Shares Corporate ownership is evidenced by a share certificate, which may be for any number of shares. The total number of shares authorized is limited by the articles of incorporation.

  14. Preferred Shares A class of shares that has several preferences over common shares. Contributed Capital Common Shares The most basic form of capital issued by every corporation.

  15. Learning Objective 2 Measure the effect of issuing shares on a company’s financial position.

  16. Issuing Shares Corporations need money to operate from sources other than borrowing. They sell (issue) shares directly to the shareholders or use the service of an underwriter.

  17. Common Shares When a company issues shares, it debits the asset receivedand credits the share account. January 8 Cash (6,200,000 × $10) 7,000,000 Common Shares 7,000,000 To issue common shares

  18. Preferred Shares Accounting for preferred shares follows the pattern illustrated for common shares. Shareholders’ equity on the balance sheet lists preferred shares, common shares, and retained earnings – in that order.

  19. Ethical Considerations Issuing shares for assets other than cash can pose an ethical challenge. The company issuing the shares often wishes to record a large amount for the noncash asset received and for the shares that it is issuing.

  20. Learning Objective 3 Describe how share repurchase transactions affect a company.

  21. Share Repurchase Transactions Repurchased shares are shares that a company has issued and later reacquired. Issuing shares grows a company’s assets and equity. Repurchasing shares shrinks assets and equity.

  22. Shareholders’ Equity December 31, 2004 ($000s) Common Shares $ 10,000 Retained earnings 193,632 Total equity $263,490 Ava Smallco Ltd. Before Share Repurchase Transaction

  23. During 2005, Ava Smallco Ltd. paid $12,000 to repurchase 1,000 shares of its common shares. Ava Smallco Ltd. Repurchase of Shares November 12, 2005 Common shares 7,000 Retained earnings 5,000 Cash 12,000 Repurchased common shares for cancellation

  24. Shareholder’s Equity at November 12, 2005 ($000s) Common Shares, 9,000 issued $ 63,000 Retained earnings 188,632 Total equity $251,320 Ava Smallco Ltd. After Repurchase of Shares

  25. Retained Earnings,Dividends, and Splits The Retained Earnings account carries the balance of the business’s net income less its net losses and less any declared dividends accumulated over the corporation's lifetime.

  26. Retained Earnings,Dividends, and Splits A dividendis a corporation’s return to its shareholders of some of the benefits of earnings. A stock splitis an increase in the number of authorized, issued, and outstanding shares.

  27. Dividend Dates Three relevant dates for dividends are: Declaration date Date of record Payment date

  28. Learning Objective 4 Account for dividends and measure their impact on a company.

  29. Preferred Share Dividends When a company has issued both preferred and common shares, the preferred shareholders receive their dividends first. Pinecraft Industries Inc. has 100,000 of $1.50 cumulative preferred shares and common shares outstanding.

  30. Preferred Share Dividends Preferred dividends are paid at the annual rate of $1.50 per share. Assume that in 2004, the company declares an annual dividend of $1,000,000. Preferred dividend (100,000 × $1.50 per share) $150,000 Common dividend (remainder: $1,500,000 – $150,000) 850,000 Total dividend $1,000,000

  31. Preferred Share Dividends The preferred shares of Pinecraft are cumulative. Suppose the company passed the 2004 preferred dividend of $150,000. In 2005, the company declares a $500,000 dividend. Retained Earnings 500,000 Dividends Payable, Preferred 300,000* Dividends Payable, Common ($500,000 – $300,000) 200,000 To declare a cash dividend *($150,000 × 2 years)

  32. Why Issue a Stock Dividend? To continue dividends, but conserve cash To reduce the per-share market price of its shares

  33. Stock Dividend Trans Canada Pipelines (TCP) declared a 2% stock dividend. TCP had 480 million common shares outstanding. The shares are trading for $30 per share. How would this stock dividend be recorded?

  34. Retained Earnings (48,000 × 2% × $30) 288,000,000 Common Shares 288,000,000 Distributed a 2% stock dividend Stock Dividend

  35. Stock Splits A stock split is an increase in the number of authorized, issued, and outstanding shares, coupled with a proportionate reduction in the share’s par value. A stock split decreases the market price of shares.

  36. Stock Splits The market price of a share of Winpak Ltd. has been approximately $120. Assume that the company wants to decrease it to approximately $60.00. This 2-for-1 split means that the company would have twice as many shares outstanding after the split as is had before the split.

  37. Learning Objective 5 Use different share values in decision making.

  38. Share Values Market value Redemption value Liquidation value Book value

  39. Book Value Book value per preferred share = (Redemption value + Dividendsin arrears) ÷ Number of preferred shares outstanding Book value per common share = (Total shareholders’ equity – Preferred equity) ÷ Number of common shares outstanding

  40. Shareholders’ Equity Preferred shares, $6.00, 400 shares issued, redemption value $130 per share $ 40,000 Common shares, 5,000 shares issued 131,000 Retained earnings 70,000 Total shareholders’ equity $241,000 Book Value Assume that a company’s balance sheet reports the following:

  41. Book Value Suppose that four years’ (including the current year) cumulative preferred dividends are in arrears and that preferred shares have a redemption value of $130 per share. The book-value-per-share computations for this company are as follows:

  42. Book Value Preferred equity: Redemption value (400 shares × 130) $ 52,000 Cumulative dividends (400 × $6.00 × 4 years) 9,600 Preferred equity $ 61,600 Common equity: Total shareholders’ equity $241,000 Less preferred equity – 61,600 Common equity $179,400 Book value per share: $179,400 ÷ 5,000 shares $ 35.88

  43. Learning Objective 6 Evaluate a company’s return on assets and return on shareholders’ equity.

  44. Return on Assets Rate of return on total assets = (Net income + Interest expense) ÷ Average total assets It is a measure of a company’s ability to generate profits from the use of its assets.

  45. Return on Equity Rate of return on common shareholders’ equity = (Net income – Preferred dividends) ÷ Average common shareholders’ equity It is a measure of the income earned from the common shareholders’ investment in the company.

  46. Return on Equity Sobey’s return on equity (17.7%) is higher than its return on assets (9.2%). This difference results from the interest-expense component of return on assets. Leverage

  47. Learning Objective 7 Report shareholders’ equity transactions on the cash flow statement.

  48. Reporting Shareholders’Equity Transactions During 2002, Intrawest issued shares, repurchased shares, but paid no dividends. Following is their report of cash flows from financing activities illustrating the effect on their shareholders’ equity. Proceeds from issuance of common shares $ 53,037 Net cash provided by financing activities $ 53,037

  49. End of Chapter 9

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