Transcript
Allama iqbal open university
Maria javedMba IT
Topic
Affect of changes in shareholder
equity
Main headings:Introduction to the topicImportant sub-topicsPractical study of the
organizationSwot analysis Conclusion recommendation
Definition of Shareholders Equity
Shareholders equity is the difference between total assets and total liabilities. It is also the Share capital retained in the company in addition to the retained earnings minus the treasury shares. Shareholders equity is the amount that shows how the company has been financed with the help of common shares and preferred shares. Shareholders equity is also called Share Capital, Stockholder’s Equity or Net worth.
The Importance of Shareholders in Business
Shareholders are the owners of companies. A small business may have just one shareholder, the founder, while a public company may have thousands of individual and institutional shareholders, such as mutual fund companies, pension funds and hedge funds. Shareholders play an important role in the financing, operations, governance and control aspects of a businesses.
Cont……..
Financing:One of the primary reasons for
going public is to raise funds from investors. In return, the company's founders give up part ownership to these new investors. Private companies and startups may also raise funds through private placements, which are share issues to a select group of individuals and institutions
Operations:
Shareholders play both direct and indirect roles in a company's operations. They select directors who appoint and supervise senior officers, including the chief executive officer and the chief financial officer. They play an indirect role through the stock market.
Governance:Public companies usually have formal
corporate governance policies, such as the composition and roles of different board committees, the role of the chairman, codes of conduct and business ethics. Boards of directors answer to shareholders, not to management. Public companies must provide timely and complete disclosures to shareholders
Control:
Shareholders usually determine who controls a public company. A widely held company, in which there is not a single majority shareholder, is vulnerable to hostile takeover attempts. Shareholders can block such moves if they are satisfied with the current management or if they believe the offering price is insufficient
Components of a Statement of Shareholders' Equity
There are six common categories included on a statement of shareholders' equity.
Preferred Stock Preferred stock is a class of stock whose
holders receive dividends from profits before common stockholders do. In the case of a company's going out of business, preferred stockholders are given priority in claiming assets
Common Stock Common stock is all stock other than
preferred stock. Common stockholders are given voting power in shareholder election.
Additional Paid-In Capital Additional paid-in capital is the amount
paid in excess of the par value of both preferred and common stock. For example, if the par value of a stock is $100 but was purchased by investors by $110, $100 would be recorded under a stock account, and $10 would be recorded as additional paid-in capital
Retained Earnings Retained earnings are the amounts that
a business earns that have not been distributed as dividends. Retained earnings are often held so a business can reinvest in its development or pay debt. Retained earnings is a summary of the changes in net income.
Accumulated Other Comprehensive Income: is the amount of no owner changes in equity that occur other than net income. Unrealized gains or losses on investments are examples of items that fall under this category.
Treasury Stock:
◦Treasury stock is stock that a business issues to investors and then repurchases. A business could purchase back stock to sell or give to employees or to adjust the market price of the company's stock.
Practical study of the organization
NATIONAL BANK OF PAKISTAN
HistoryNational bank of Pakistan (NBP) was
developed in 1949. It served as the central regulatory bank of Pakistan till the time State Bank of Pakistan was established in 1949. National bank of Pakistan is the complete government bank and it undertook government treasury operations. The two major competitors of national bank of Pakistan are united bank limited (UBL) and Habib bank of Pakistan. The first branch was open in I.I Chandigarh road Karachi. And after, they make it the head office of the bank
Mission:
Institutionalizing a merit and performance based culture
Creating a distinctive brand identity by providing the highest standards
of servicesAdopting the best international
management practicesMaximizing stakeholders valueDischarging our responsibility as a good
corporate citizen of Pakistan and in countries where we operate
VISION
To be recognized as a leader and a brand synonymous with trust, highest standards of service quality, international best
practices and social responsibility.
GOAL:
To enhance profitability and maximization of NBP share through increasing leverage of existing customers base and diversified range of products
The Effects of Change in Shareholder EquityThe total assets minus liabilities in a
corporation -- as only incorporated companies have shareholders -- is called shareholder equity. Shareholder equity represents the amount of value in a company that shareholders, as owners, collectively own. Any change in company assets or liabilities affects shareholder equity.
Equity versus Market Value
Equity is not market value. Shares -- which are tiny fractions of ownership in a company -- are traded on secondary markets, where a market price per share constantly fluctuates in accordance with investor expectations about the future of the company. Equity reflects measurable value based on the company's current holdings, debts and activities.
Effects
Equity does not directly affect or cause anything. Changes in equity can affect the market price of shares and investor sentiment, but the underlying causes of the change are more important. However, if a company is liquidated, shareholder equity represents what shareholders receive, if anything.
Changes:Generally, an increase in shareholder equity is a
positive change and may cause the market value of shares to increase. Increases mean that either debt and other liabilities have decreased or assets and profits have increased, both of which investors like to see happen and markets see as favorable developments.
FactorsThe underlying cause of an increase or a
decrease is more important than the change itself and may have a larger effect. An increase in shareholder equity due to an increase in accounts receivable could signal problems in collections, whereas an increase due to high returns on investments means more cash to shareholders and is positive.
Similarly, a decrease due to increased debt for a capital expansion or hot acquisition may be read as positive because it signals future growth, whereas a decrease due to soaring interest rates on debt is negative.
Swot analysisStrength:Limited liability of stockholdersTransferability of sharesContinued life existenceGreater source of fundsCentralized management
Weaknesses:Complicated information and
operationGreater degree of government
control and supervisionWeakened credit standingHeavier income tax
Opportunities:
The growing marketEarn good incomeBuild the business over the year
Threats:
Dispute between shareholder, director and business partner
Poor integrationTarget company stock
Conclusion:Shareholder's equity is the portion of a
company owned by the shareholders. It is calculated by subtracting liabilities from assets. Shareholders are the owners of companies. , while a public company may have thousands of individual and institutional shareholders, such as mutual fund companies, pension funds and hedge funds. Shareholders play an important role in the financing, operations, governance and control aspects of a businesses.
Recommendation:Understand from the company’s broker what
demand is like for the shares so that buyers can quickly be found for the activist’s holding when/if it decides to sell up.
Spend time educating shareholders on the business and its strategy, focusing on long- term value or, in the case of high yielding stocks, income return.
Be prepared to act and react in a variety of scenarios according to a solid strategy. Do not give emotional or hostile quotes to the media.