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Year 2011 Step 1: Current preferred dividend 9,000$
Step 2: Remainder to common shareholders 33,000$
If Preferred Stock is Cumulative:Year 2010 $5,000 dividends declared 5,000$ -$
Year 2011 Step 1: Dividends in arrears 4,000$ Step 2: Current preferred dividend 9,000 Step 3: Remainder to common shareholders 29,000$
Totals 13,000$ 29,000$
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I just converted 100 shares of preferred stock into
1,000 shares of common stock and ended up with a
higher dividend yield!
I just converted 100 shares of preferred stock into
1,000 shares of common stock and ended up with a
higher dividend yield!
Some preferred stock is
convertible into shares of
common stock.
Other Features of Preferred StockOther Features of Preferred Stock
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Preferred StockPreferred Stock
Stockholders' Equity with Common and Preferred StockStockholders' Equity Contributed Capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued and outstanding 5,000$ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Additional Paid-in Capital 1,000 Retained Earnings 65,000 Total Stockholders' Equity 371,000$
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Book Value per ShareBook Value per Shareof Common Stockof Common Stock
Total Stockholders’ EquityNumber of Common Shares Outstanding
Preferred stock and preferreddividends in arrears are deducted
from total stockholders’ equity.
Book Value Market Value≠
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Book Value With Both Preferred and Book Value With Both Preferred and Common StockCommon Stock
Davis company has paid no dividends in the current year. As of December 31st, dividends in arrears on cumulated preferred stock total $50,000. All equity belongs to common stockholders except the $500,000 applicable to preferred stock and the $50,000 dividends in arrears. Here is the calculation of book value for common stock:
Total stockholders' equity 1,950,000$ Less: Equity of preferred stockholders" Par value of preferred stock 500,000$ Dividends in arrears 50,000 550,000 Equity of common stockholders 1,400,000 Number of common shares outstanding 700,000 Book value per share of common stock 2.00$
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Accounting by the issuer.
Accounting by the issuer.
Accounting by the investor.
Accounting by the investor.
Common stock is carried at original issue
price.
Common stock is carried at original issue
price.
Investments in marketable securities are carried at market
value.
Investments in marketable securities are carried at market
value.
Market ValueMarket Value
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Market Price of Preferred StockMarket Price of Preferred Stock
Factors affecting market price of preferred stock:
• Dividend rate• Risk• Level of interest rates
The return based on the market value is called the
“dividend yield.”
The return based on the market value is called the
“dividend yield.”
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Factors affecting market price of common stock:Investors’
expectations of future profitability.
Risk that this level of profitability will not be achieved.
Factors affecting market price of common stock:Investors’
expectations of future profitability.
Risk that this level of profitability will not be achieved.
Changes in market value
have no impact on the books of the issuer.
Changes in market value
have no impact on the books of the issuer.
Market Price of Common StockMarket Price of Common Stock
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Ice Cream Parlor
Stock SplitsNow
Available
Stock SplitsStock Splits
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
Companies use stock splits to reduce market price.
Outstanding shares increase, but par value is decreased proportionately.
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Assume a corporation has 5,000 shares of $1 par value common stock
outstanding before a 2–for–1 stock split.
Increase
Decrease
No Change
Stock SplitStock Split
Before Split After Split
Common Stock Shares 5,000 10,000
Par Value per Share 1.00$ 0.50$
Total Par Value 5,000$ 5,000$
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When stock is reacquired, the corporation records the treasury stock at cost.
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury shares are
issued shares that have been reacquired
by the corporation.
Treasury StockTreasury Stock
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Riley Corporation reacquires 3,000 of its common shares in the open market at $55
per share.Prepare the journal entry to record the
purchase of treasury stock.
Recording Purchases of Recording Purchases of Treasury StockTreasury Stock
Stockholders' Equity Contributed capital: Preferred Stock - $100 par value; 1,000 shares authorized; 50 shares issued & outstanding 5,000$ Common Stock - $10 par value; 50,000 shares authorized; 30,000 shares issued and outstanding 300,000 Contributed Capital in Excess of Par 21,000 Retained earnings 65,000 Subtotal 391,000$ Less: Treasury stock 110,000 Total Stockholders' equity 281,000$
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Stock Buyback ProgramsStock Buyback Programs
Some corporations have buyback programs, in which they repurchase large amounts of their own common stock. As a result of these programs, treasury stock has become a material item in the balance sheet of many corporations.
Stock option plans are an important part of employee compensation for many companies. Treasury stock purchases are an effective means by which the company can have available the shares of stock needed to satisfy the requirement of stock option plans to issue the shares of stock to employees.
Some corporations have buyback programs, in which they repurchase large amounts of their own common stock. As a result of these programs, treasury stock has become a material item in the balance sheet of many corporations.
Stock option plans are an important part of employee compensation for many companies. Treasury stock purchases are an effective means by which the company can have available the shares of stock needed to satisfy the requirement of stock option plans to issue the shares of stock to employees.
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Financial Analysis andFinancial Analysis andDecision MakingDecision Making