BMGT 220, Chapter 11 Discussion

1. BMGT 220, Chapter 11 Discussion KristianSooklal kristiansooklal@yahoo.com 443-797-4588 (cell) | 410-575-4719 (text)

2. Plan for today • Chapter 10 quiz Cost of borrowing question: Total Cost of Borrowing = Total Interest over life of Bond + Discount OR Total Cost of Borrowing = Total Interest over Life of Bond - Premium • Cover lecture material on Chapter 11 • Cover Chapter 11 Practice Quiz • See website for updates: • http://ksooklal.comuv.com/BMGT220/

3. Quiz Averages Syllabus – 9.37 Chapter 1 – 7.85 Chapter 2 – 8.2 Chapter 3 – 7.35 Chapter 5 – 5.91 Chapter 6 – 5.85 Chapter 8 – 5.19 Chapter 9 – 10 Chapter 10 -- ? Overall: 7.4653

4. Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. Stock Splits

5. Illustration: Assume Daisy Corporation splits its 50,000 shares of common stock on a 2-for-1 basis. Stock Splits Results in a reduction of the par or stated value per share.

6. The Implication of Stock Splits Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00 Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12 This means, 1 share of Microsoft in 1986 = 288 shares today So, an investment of $28 on March 13, 1986 = $8,672 on April 10, 2013

7. BERKSHIRE HATHAWAY, Inc. Class A(CEO: Mr. Warren Edward Buffet) What happens when a stock does NOT split? Stock price on October 14, 1976 = $67 Stock price on April 10, 2013 = $158,846 (Shares outstanding = 1.65 million)

8. Key Topics in Chapter 11 • Characteristics of a corporation: • Separate Legal Existence • Limited Liability of Stockholders • Transferable Ownership Rights • Ability to Acquire Capital (through stocks) • Continuous Life (going concern) • Corporation management • Regulations • Corporate Tax • Common Stock • Authorized (the maximum shares the company can sell) • Issued (all common stock that has ever been sold by company) • Outstanding (shares that are owned by external investors)

9. Key Topics in Chapter 11 (Continued) • Par value: arbitrary value which is usually quite low • See Google example from lectures • Market value: no relation to par value • What the stock is currently selling for in the “market” • No par value stock: • Sometimes have a “stated value”, which is pretty much the same thing • Some stock have no par value and no stated value • Recorded at cost • Issuance of stock at par for cash: Cash 1000 Common Stock 1000 • Issuance of stock with no par, no stated value for cash: Cash 1000 Common Stock 1000

10. Key Topics in Chapter 11 (Continued) • Issuance of stock above par: Cash 1800 Common Stock (at par) 1000 Paid-in capital in excess of par value, common stock 800 • Issuance of stock above stated value: Cash 1800 Common Stock 1000 Paid-in capital in excess of stated value, common stock 800 • Treasury Stock (contra-equity) Purchased: Treasury Stock 980 Cash 980 • Note that par value of the stock is irrelevant • Sale of Treasury Stock above Cost Cash 2000 Treasury Stock (at cost) 980 Paid-In Capital from Treasury Stock 1020

11. Key Topics in Chapter 11 (Continued) • Sale of Treasury Stock Below Cost (assuming sufficient Paid-In Capital, from Treasury Stock): Cash 960 Paid-In Capital from Treasury Stock 20 Treasury Stock 980 • Sale of Treasury Stock Below Cost (with no Paid-In Capital, from Treasury Stock) Cash 900 Retained Earnings 80 Treasury Stock 980 • Sale of Treasury Stock Below Cost (with some Paid-In Capital, but not enough) Cash 800 Retained Earnings 100 Paid In Capital from Treasury Stock 80 Treasury Stock 980

12. Key Topics in Chapter 11 (Continued) • Preferred Stock • Get Dividends First • #1: Noncumulative • Only get dividends in current year when dividends are paid • Any dividends owed from previous years do NOT accumulate • #2: Cumulative (dividends in arrear) • Must be paid all dividends owed from all years of holding stock before common stock holders can be paid • Dividends owed from previous years DO accumulate • Cash Dividends (only applies to outstanding shares) Declaration Date: Cash Dividends 98001 Dividends Payable 98001 Record Date (no entry): Payment Date: Dividends Payable 98001 Cash 98001

13. Key Topics in Chapter 11 (Continued) • Stock Dividends (small stock dividend) Declaration Date: Stock Dividends (market value) 1098908 Common Stock Dividends Distributable (par value) 1000000 Paid-In Capital In Excess of Par value 98908 Payment Date: Common Stock Dividends Distributable 1000000 Common Stock 1000000

14. Key Topics in Chapter 11 (Continued) • Stock Dividends (large stock dividend) Declaration Date: Stock Dividends (par value) 1000000 Common Stock Dividends Distributable (par value) 1000000 Payment Date: Common Stock Dividends Distributable 1000000 Common Stock 1000000 • Stock Split: • Number of shares increases by some amount • Par Value decreases inversely proportionally • No effect on total paid-in capital, no effect on retained earnings, no effect on total stockholder’s equity • No journal entry 