Corporate Stock and Earnings Issues Chapter 24. Corporate Capital Structure Stockholders’ Equity Contributed Capital Retained Earnings.
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Capital Stock and Legal Capital
• Capital stock - ownership unit
• Stockholders - owners of a corporation
• Stock certificate - legal document of ownership of shares of stock
• Legal capital - total par value of the issued capital stock
Stockholders’ Rights
• Attend stockholders’ meetings• Vote in the election of the board of directors• Share in net income by receiving dividends• Purchase additional capital stock if it is
issued (preemptive right)• Share in the distribution of the assets of the
corporation if it is liquidated
Stock Terminology
• Par value
• No-par capital stock
• Stated value
• Additional paid-in capital
• Common stock
• Preferred stock
Stockholders’ Equity on the Balance SheetStockholders’ Equity
Contributed capital
Preferred stock, $100 par, 2,000 shares authorized, 600 shares issued and outstanding $ 60,000
Additional paid-in capital on preferred stock 72,000
Common stock, $10 par, 30,000 shares authorized, 9,000 shares issued and outstanding 90,000
Additional paid-in capital on common stock 43,000Total contributed capital $265,000
Retained earnings 173,000
Total Stockholders’ Equity $438,000
Articles of Incorporation
The articles of incorporation lists the following:• Classes of stock• Par or stated value• Number of authorized shares• Preference provisions for preferred
stock
Transfer of Stock Between Stockholders
• Trading of stock among stockholders does not affect the corporation’s financial statements
• The corporation must keep records of the names and addresses of the stockholders for mailing reports and dividends
Treasury Stock
Treasury stock is a corporation’s own capital stock that:
• stockholders fully paid for and the corporation issued
• the corporation later reacquired, and
• the corporation currently holds
Reasons to Acquire Treasury Stock
• To have shares available for employee-purchase plans
• To have shares available for conversion of convertible stock
• To invest excess cash
• To have shares for the acquisition of other companies
Reasons to Acquire Treasury Stock
• To reduce the number of shares outstanding and increase earnings per share
• To have shares for use in the issuance of a stock dividend
• To concentrate ownership of the shares as a defense against hostile takeovers
Acquisition of Treasury Stock
Treasury Stock
5,6005,600
Cash
Issued capital stock - Treasury stock
= Outstanding capital stock
Reissuance of Treasury Stock
Treasury Stock
Additional Paid-in Capital
4,200
300
4,500
CashBal. 5,600
Bal. 1,400
Bal. 10,300
Bal. 10,000
Stock Options
Compensatory stock options are intended to provide additional compensation to the corporation’s employees.
Corporate Income Statement
Income from continuing operations Operating income Nonoperating income (other items) Income tax expense related to continuing operations
Results of discontinued operations
Income (loss) from operations of a discontinued segment (net of income taxes
Gain (loss) on disposal of discontinued segment (net of income taxes)
Extraordinary gains or losses (net of income taxes)
Net income
Earnings per share
Basic Earnings Per Share
Net Income - Preferred Dividends
Weighted Average Number of Common Shares Outstanding
Weighted Average Common Shares
Number of Shares Outstanding
X Fraction of Year Outstanding
= Weighted Average Number of Shares
Reporting Earnings Per Share
Earnings Per Share (EPS) are reported on the income statement directly below the net income.
EPS are computed for:
• Income from continuing operations
• Results of discontinued operations
• Extraordinary gain or loss
• Net income
Diluted Earnings Per Share
• Complex capital structure - when stock options and convertible securities have been issued
• Potential common shares - securities that can be converted into common stock
• Diluted EPS - shows the effects of all potential common shares that would reduce earnings per share
Price/Earnings Ratio
Market Price Per Share
Earnings Per Share
The price/earnings ratio indicates how much investors are willing to pay per dollar of current earnings.
Cash Dividends on Preferred Stock
• Preferred stockholders have a preference to:– dividends– accumulation of dividends
• One or both of the preferences may be given to preferred stockholders
Stock Dividends
• Stock Dividend - a proportional distribution of additional shares of stock
• Small Stock Dividend - 20% or less of the previously outstanding common shares
• Large Stock Dividend - more than 20% of the previously outstanding common shares
• Stock Split - decrease in the par value per share and proportional increase in the number of shares
Statement of Changes in Stockholders’ Equity
• Changes in the different classes of capital stock
• Changes in each additional paid-in capital account
• Changes in treasury stock
• Changes in retained earnings
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