Chapter 11 Stockholders Equity Power Point Author Brandy
Chapter 11 Stockholders’ Equity Power. Point Author: Brandy Mackintosh, CA Copyright © 2016 by Mc. Graw-Hill Education
Learning Objective 11 -1 Explain the role of stock in financing a corporation. 11 -2
Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small investors can participate in corporate ownership. Simple to become an owner Easy to transfer ownership Provides limited liability Because a corporation is a separate legal entity, it can § Own assets. § Incur liabilities. § Sue and be sued. § Enter into contracts. 11 -3
Corporate Ownership Voting rights. Dividends. Stockholder Benefits Residual claims. Preemptive rights. 11 -4
Equity Versus Debt Financing Advantages of equity and debt financing. 11 -5 Advantages of equity Advantages of debt • Equity does not have to be repaid. • Interest on debt is tax deductible. • Dividends are optional. • Debt does not change stockholder control.
Stockholders’ Equity Contributed Capital Accumulated Other Comprehensive Income (Loss) Stockholders’ Equity Treasury Stock 11 -6 Retained Earnings
Learning Objective 11 -2 Explain and analyze common stock transactions. 11 -7
Authorization, Issuance, and Repurchase of Stock Authorized Shares Issued Shares 11 -8 Outstanding shares are issued shares that are owned by stockholders. Issued shares Unissued are shares of Outstanding The maximum number Unissued authorized stock are Shares of shares of capital Shares shares of shares that be never stock that can have Treasury shares are haveissued been to the public. been Treasury issued shares distributed to that have Shares been reacquired by the stockholders. corporation.
Authorization, Issuance, and Repurchase of Stock 11 -9
Stock Authorization Par value is typically a very nominal amount such a $0. 01 per share. Par value is an arbitrary amount assigned to each share of stock when it is authorized. 11 -10 Market price is the amount that each share of stock will sell for in the market.
Stock Authorization No-par Stock Some states do not require a par value to be stated in the charter. 11 -11
Stock Issuance Initial public offering (IPO) Seasoned new issue The first time a corporation issues stock to the public. Subsequent issues of new stock to the public. National Beverage issues stock. 11 -12
Stock Issuance Most issues of stock to the public are cash transactions. National Beverage issued 100, 000 shares of $0. 01 par value common stock for $20 per share. 1 Analyze Assets Cash +2, 000 2 = Liabilities + Stockholders’ Equity Common Stock +1, 000 Additional Paid-In Capital +1, 999, 000 Record 2, 000 Cash (100, 000 x $20) 1, 000 Common Stock (100, 000 x $0. 01) 1, 999, 000 Additional Paid-In Capital (2, 000 – 1, 000) 11 -13
Stock Exchanged between Investors Transactions between two investors do not affect the corporation’s accounting records. I’d like to sell 100 shares of National Beverage stock. 11 -14 I’d like to buy 100 shares of National Beverage stock.
Stock Used to Compensate Employees pay packages can include stock options. Gives the employees the option to acquire company stock at a later date at a predetermined price. If the employees work hard and meet the corporation’s goals the stock price will increase. Employees can then exercise their option to acquire stock at the lower predetermined price and sell it at the higher price for a profit. 11 -15
Repurchase of Stock A corporation repurchases its stock to: Send a signal that the company believes its stock is worth acquiring. Obtain shares to reissue for the purchase of other companies. Obtain shares to reissue to employees as part of stock option plans. Reduce the number of outstanding shares to increase per-share measures of earnings. 11 -16
Repurchase of Stock National Beverage repurchases its own stock (Treasury stock) Stockholders Employee compensation package includes salary plus stock options. Stock options allow employees to purchase stock at a later date from the corporation at a fraction of the stock’s market price. Employee 11 -17
Repurchase of Stock No voting or dividend rights Contra equity account Treasury stock is not an asset. When stock is reacquired, the corporation records the treasury stock at cost. 11 -18
Repurchase of Stock National Beverage reacquired 50, 000 shares of its common stock at $25 per share. 1 Analyze Assets = Cash -1, 250, 000 2 + Stockholders’ Equity Treasury Stock (+x. SE) -1, 250, 000 Record Treasury Stock (+x. SE) Cash 11 -19 Liabilities 1, 250, 000
Reissuance of Treasury Stock National Beverage reissued 5, 000 shares of the Treasury Stock at $28 per share. 1 Analyze Assets Cash +140, 000 2 = Liabilities + Stockholders’ Equity Treasury Stock (-x. SE) +125, 000 Additional Paid-In Capital +15, 000 Record 140, 000 Cash (5, 000 x $28) Treasury Stock (-x. SE) (5, 000 x $25) Additional Paid-In Capital [5, 000 x ($28 - $25)] 125, 000 15, 000 No profit or loss is recognized on treasury stock transactions. 11 -20
Learning Objective 11 -3 Explain and analyze cash dividends, stock dividends, and stock split transactions. 11 -21
Dividends on Common Stock Declared by board of directors. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. 11 -22
Dividends Dates 1. Declaration Date 2. Date of Record 3. Date of Payment 4. Year End 11 -23
Dividends Dates National Beverage declares a cash dividend of $118, 139, 000 during it’s 2013 fiscal year. 1 Analyze Assets = Liabilities Dividends Payable +118, 139, 000 2 Stockholders’ Equity Dividends -118, 139, 000 Record Dividends Payable 11 -24 + 118, 139, 000
Dividends Dates National Beverage paid the previously declared cash dividend of $118, 139, 000. 1 Analyze Assets Cash -118, 139, 000 2 Liabilities + Stockholders’ Equity Dividends Payable -118, 139, 000 Record Dividends Payable Cash 11 -25 = 118, 139, 000
Dividends Dates All temporary accounts, including Dividends, are closed into Retained Earnings at each accounting year-end. 1 Analyze Assets = Liabilities + Stockholders’ Equity Dividends Retained Earnings 2 -118, 139, 000 Record Retained Earnings Dividends 11 -26 +118, 139, 000
Stock Dividends Distribution of additional shares of stock to stockholders. No change in total stockholders’ equity. No change in par values. All stockholders retain same percentage ownership. Corporations issue stock dividends to: Reduce the market price per share of stock. Demonstrate commitment to stockholders while conserving cash during difficult times. Signal that the company expects strong financial performance in the future. 11 -27
Stock Dividends Small Large Stock dividend < 25% Stock dividend > 25% Record at current market value of stock. Record at par value of stock. The journal entry moves an amount from Retained Earnings to other equity accounts. 11 -28
Stock Splits An increase in the number of shares and a corresponding decrease in par value per share. Retained earnings is not affected. A stock split creates more pieces of the same pie. Assume that a corporation had 1, 000 shares of $0. 01 par value common stock outstanding before a 2–for– 1 stock split. 11 -29
Comparison of Distributions to Stockholders 11 -30
Learning Objective 11 -4 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. 11 -31
Preferred Stock Issuance Priority over common stock Preferred Stock Usually has a fixed dividend rate Usually has no voting rights National Beverage issued 400, 000 shares of its $1 par value preferred stock for $19, 704, 000. 1 Analyze Assets = Cash +19, 704, 000 2 + Stockholders’ Equity Preferred Stock +400, 000 Additional Paid-In Capital +19, 304, 000 Record Cash Preferred Stock Additional Paid-In Capital 11 -32 Liabilities 19, 704, 000 400, 000 19, 304, 000
Preferred Stock Dividends • Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock. • Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid. If the preferred stock is noncumulative, any dividends not declared in previous years are lost permanently. 11 -33
Preferred Stock Dividends Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8, 000 in 2015 and $10, 000 in 2016. How much would the preferred and common stockholders receive in 2015 and 2016? 11 -34
Preferred Stock Dividends 11 -35
Preferred Stock Dividends Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2013 and 2014. How much would the preferred and common stockholders receive in 2015 and 2016? 11 -36
Preferred Stock Dividends 11 -37
Retained Earnings Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating. Baker Company Comparative Balance Sheets (Partial) For Year Ended December 31 Stockholders’ Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders’ Equity 2015 2014 $ 100, 000 750, 000 900, 000 $ 100, 000 750, 000 (70, 000) 780, 000 Baker Company incurred a loss of $130, 000 in 2014 that resulted in an Accumulated Deficit in Retained Earnings. 11 -38
Statement of Stockholders’ Equity 11 -39
Learning Objective 11 -5 Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios. 11 -40
Earnings Per Share (EPS) Earnings per share is probably the single most widely watched financial ratio. Net Income – Preferred Dividends EPS = Average Number of Common Shares Outstanding National Beverage’s income for 2013 was $46. 92 million, preferred dividends of $0. 15 million, and the average number of shares outstanding during the year was 46. 2 million. EPS = 11 -41 $46. 9 – $0. 2 46. 2 Shares = $1. 01 per share
Return on Equity (ROE) Return on equity is the amount earned for each dollar invested by common stockholders. ROE = Net Income – Preferred Dividends Average Common Stockholders’ Equity National Beverage’s income for 2013 was $46. 9 million, preferred dividends were $0. 2 million, and the average Common Stockholders’ Equity was $86 million. ROE 11 -42 = $46. 9 - $0. 2 $86 = 54. 3 percent
Price/Earnings (P/E) Ratio The P/E ratio is a measure of the value that investors place on a company’s common stock. P/E = Current Stock Price (per share) Earnings Per Share (annual) National Beverage’s stock price was $17. 92 when the company reported its 2013 EPS of $1. 01. P/E 11 -43 = $ 17. 92 = $ 1. 01 17. 7
Comparison of EPS, ROE, and P/E Ratios 11 -44
Supplement 11 A Owners’ Equity for Other Forms of Business Copyright © 2016 by Mc. Graw-Hill Education
Learning Objective 11 -S 1 Account for owners’ equity in other forms of business. 11 -46
Owner’s Equity for a Sole Proprietorship Only two owner’s equity accounts. 11 -47 A Capital account to record the owner’s investments and the periodic income or loss. A Withdrawal account to record the owner’s withdrawals of assets. No separate retained earnings account. Closed to the capital account at the end of each period.
Accounting for Owner’s Equity for a Sole Proprietorship To record a $150, 000 investment by H. Simpson, the owner. To record H. Simpson’s $1, 000 monthly withdrawal. 11 -48
Accounting for Owner’s Equity for a Sole Proprietorship To close revenue and expense accounts to capital. To close the $1, 000 monthly drawings to capital. 11 -49
Accounting for Partnership Equity Accounting for assets, liabilities, revenues, and expenses follows the same accounting principles as any other form of business. Accounting for partners’ equity follows the same pattern as for a sole proprietorship. Separate Capital and Drawings accounts are maintained for each partner. 11 -50
Accounting for Partnership Equity To record investments by partners Able and Baker who will divide net income as follows: Able, 60 percent and Baker, 40 percent. To record the partners’ monthly withdrawal. 11 -51
Accounting for Partnership Equity To close revenue and expense accounts to partners’ capital. To close the monthly drawings to partners’ capital. 11 -52
Other Business Forms Limited Liability Partnership (LLP) 11 -53 Limited Liability Company (LLC) • Protects innocent partners from malpractice or negligence claims. • Owners have same limited liability feature as owners of a corporation. • Most states hold all partners personally liable for partnership debts. • A limited liability company typically has a limited life.
Learning Objective 11 -S 2 Record journal entries for large and small stock dividends. 11 -54
Large Stock Dividends National Beverage declared a large stock dividend several years ago, resulting in the issuance of 7. 6 million common shares with a par value of $0. 01 per share. 1 Analyze Assets = Liabilities + Stockholders’ Equity Retained Earnings -76, 000 Common Stock +76, 000 2 Record Retained Earnings Common Stock 11 -55 76, 000
Small Stock Dividends Assume National Beverage issues a small stock dividend of 10, 000 common shares when its stock is trading at $20 per share. A small stock dividend is accounted for at the market value of the company’s stock. 1 Analyze Assets = Liabilities + Stockholders’ Equity Common Stock +100 Additional Paid-In Capital +199, 900 Retained Earnings -200, 000 2 Record Retained Earnings Common Stock Additional Paid-In Capital 11 -56 200, 000 199, 900
Chapter 11 Solved Exercises M 11 -4, M 11 -7, E 11 -3, E 11 -6, E 11 -8, E 11 -11, E 11 -17 Copyright © 2016 by Mc. Graw-Hill Education
M 11 -4 Analyzing and Recording the Issuance of Common Stock To expand operations, Aragon Consulting issued 1, 000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance. 1 Analyze Assets = Cash +50, 000 2 + Stockholders’ Equity Common Stock +1, 000 Additional Paid-In Capital +49, 000 Record Cash Common Stock Additional Paid-In Capital 11 -58 Liabilities 50, 000 1, 000 49, 000
M 11 -4 Analyzing and Recording the Issuance of Common Stock Would your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2. The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ. 1 Analyze Assets = Cash +50, 000 2 + Stockholders’ Equity Common Stock +2, 000 Additional Paid-In Capital +48, 000 Record Cash Common Stock Additional Paid-In Capital 11 -59 Liabilities 50, 000 2, 000 48, 000
M 11 -7 Determining the Amount of a Dividend Netpass Company has 300, 000 shares of common stock authorized, 270, 000 shares issued, and 100, 000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid? Dividends are paid on shares that are issued and outstanding. Dividends are not paid on treasury stock. Shares issued 270, 000 Less treasury stock 100, 000 Shares outstanding 170, 000 Dividend per share Total dividends paid 11 -60 x $ 1. 00 $170, 000
E 11 -3 Preparing the Stockholders’ Equity Section of the Balance Sheet North Wind Aviation received its charter during January. The charter authorized the following capital stock: The following transactions occurred during the first year of operations in the order given: a. Issued a total of 40, 000 shares of the common stock for $15 per share. b. Issued 10, 000 shares of the preferred stock at $16 per share. c. Issued 3, 000 shares of the common stock at $20 per share and 1, 000 shares of the preferred stock at $16. d. Net income for the first year was $48, 000. Required: Prepare the stockholders’ equity section of the balance sheet at December 31. 11 -61
E 11 -3 Preparing the Stockholders’ Equity Section of the Balance Sheet North Wind Aviation Stockholders’ Equity December 31, 31 2013 Contributed Capital: Preferred Stock, 8%, $10 par, 20, 000 shares authorized, 11, 000 shares issued and outstanding Additional Paid-in Capital, Preferred Common Stock, $1 par, 50, 000 shares authorized, 43, 000 shares issued and outstanding $$ 110, 000 11, 000 66, 000 43, 000 10, 000 shares ($16 –Common $10) + 1, 000 shares × ($16 – $10)617, 000 Additional Paid-in×Capital, Total Contributed Capital 836, 000 Retained 40, 000 Earnings shares × ($15 – $1) + 3, 000 shares × ($20 – $1) 48, 000 $ 884, 000 Total Stockholders’ Equity 11 -62
E 11 -6 Recording and Reporting Stockholders’ Equity Transactions Ava School of Learning obtained a charter at the start of the year that authorized 50, 000 shares of no-par common stock and 20, 000 shares of preferred stock, par value $10. During the year, the following selected transactions occurred: a. Collected $40 cash per share from four individuals and issued 5, 000 shares of common stock to each. b. Issued 6, 000 shares of common stock to an outside investor at $40 cash per share. c. Issued 8, 000 shares of preferred stock at $20 cash per share. Required: 1. Give the journal entries indicated for each of these transactions. 2. Prepare the stockholders’ equity section of the balance sheet at December 31. At the end of the year, the accounts reflected net income of $36, 000. No dividends were declared. 11 -63
E 11 -6 Recording and Reporting Stockholders’ Equity Transactions Required: 1. Give the journal entries indicated for each of these transactions. (a) Collected $40 cash per share from four individuals and issued 5, 000 shares of common stock to each. Cash (5, 000 x $40 x 4) Common Stock 800, 000 (b) Issued 6, 000 shares of common stock to an outside investor at $40 cash per share. Cash (6, 000 x $40) Common Stock 11 -64 240, 000
E 11 -6 Recording and Reporting Stockholders’ Equity Transactions Required: 1. Give the journal entries indicated for each of these transactions. (c) Issued 8, 000 shares of preferred stock at $20 cash per share. Cash (8, 000 x $20) Preferred Stock Additional Paid-in Capital 11 -65 160, 000 80, 000
E 11 -6 Recording and Reporting Stockholders’ Equity Transactions Required: 2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36, 000. No dividends were declared. Ava School of Learning Stockholders’ Equity December 31, 31 2013 December Contributed Capital: Preferred Stock, $10 par, 20, 000 shares authorized, 8, 000 shares issued and outstanding $ 80, 000 Common. Stock, no nopar, 50, 000 sharesauthorized, 26, 000 shares issued and outstanding Additional. Paid-in. Capital, Capital Preferred 1, 040, 000 80, 000 1, 200, 000 Total Contributed Capital (20, 000 shares × $40) + (6, 000 shares × ($40) 36, 000 Retained Earnings 8, 000 shares x ($20 - $10) $1, 236, 000 Total Stockholders’ Equity 11 -66
E 11 -8 Recording Treasury Stock Transactions and Analyzing Their Impact The following selected transactions occurred for Corner Corporation: Feb. 1 Purchased 400 shares of the company’s own common stock at $20 cash per share; the stock is now held in treasury. Jul. 15 Issued 100 of the shares purchased on February 1, for $30 cash per share. Sept. 1 Issued 60 more of the shares purchased on February 1, for $15 cash per share. Required: 1. Show the effects of each transaction on the accounting equation. 2. Give the indicated journal entries for each of the transactions. 3. What impact does the purchase of treasury stock have on dividends paid? 4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income? 11 -67
E 11 -8 Recording Treasury Stock Transactions and Analyzing Their Impact Required: 1. Show the effects of each transaction on the accounting equation. 1 Analyze Date Assets = Liabilities + Stockholders’ Equity Feb. 1 Cash - 8, 000 Treasury Stock (+x. SE) - 8, 000 Jul. 15 Cash + 3, 000 Treasury Stock (-x. SE) Additional Paid-in Capital – treasury + 2, 000 Sept. 1 11 -68 Cash + 900 Treasury Stock (-x. SE) Additional Paid-in Capital ++1, 000 + 1, 200 - 300
E 11 -8 Recording Treasury Stock Transactions and Analyzing Their Impact Required: 2. Give the indicated journal entries for each of the transactions. 2 Record Feb. 1 Treasury Stock (+x. SE) Cash (400 x $20) 2 3, 000 2, 000 1, 000 Record Sept. 1 Cash (60 x $15) Additional Paid-in Capital Treasury Stock (-x. SE) (60 x $20) 11 -69 8, 000 Record July 15 Cash (100 x $30) Treasury Stock (-x. SE) Additional Paid-In Capital 2 8, 000 900 300 1, 200
E 11 -8 Recording Treasury Stock Transactions and Analyzing Their Impact Required: 3. What impact does the purchase of treasury stock have on dividends paid? Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased. 4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income? The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance sheet accounts. 11 -70
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings The annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $100, 000 in the current year. It also declared and paid dividends on common stock in the amount of $2 per share. During the year, Sneer had 1, 000 common shares authorized; 300, 000 shares had been issued; 100, 000 shares were in treasury stock. The opening balance in Retained Earnings was $800, 000 and Net Income for the current year was $300, 000. Required: 1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock. 2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31. 3. Prepare a journal entry to close the Dividends account. 11 -71
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings 1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock. a. Preferred Stock Declaration Dividends Payable 100, 000 Payment Dividends Payable Cash 11 -72 100, 000
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings 1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock. b. Common Stock Dividends are paid on shares that are issued and outstanding. Dividends are not paid on treasury stock. Shares issued Less treasury stock Shares outstanding Dividend per share Total dividends paid 11 -73 300, 000 100, 000 200, 000 x $ 2. 00 $400, 000
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings 1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock. b. Common Stock Declaration Dividends Payable 400, 000 Payment Dividends Payable Cash 11 -74 400, 000
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings 2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31. Sneer Corporation Statement of Retained Earnings For Year Ended December 31 Retained Earnings, January 1 Plus: Net Income 300, 000 Less: Dividends on Preferred Stock (100, 000) Dividends on Common Stock (400, 000) Retained Earnings, December 31 11 -75 $ 800, 000 $ 600, 000
E 11 -11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings 3. Prepare a journal entry to close the Dividends account. Close Dividends Account Retained Earnings Dividends 11 -76 500, 000
E 11 -17 Determining the Effect of a Stock Repurchase on EPS and ROE Swimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2015. During the quarter ended March 31, SPI reported Net Income of $5, 000 and declared and paid cash dividends totaling $5, 000. Required: 1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31. Net Income EPS = Average Number of Common Shares Outstanding EPS = 11 -77 $5, 000 50, 000 Shares = $0. 10 per share
E 11 -17 Determining the Effect of a Stock Repurchase on EPS and ROE Required: 1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31. ROE 11 -78 = Net Income Average Stockholders’ Equity = $5, 000 $100, 000 = 5. 0 percent
E 11 -17 Determining the Effect of a Stock Repurchase on EPS and ROE Required: 2. Assume SPI repurchases 10, 000 shares of its common stock at a price of $2 per share on April 1, 2015. Also assume that during the quarter ended June 30, 2015, SPI reported Net Income of $5, 000, and declared and paid cash dividends totaling $5, 000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2015. EPS = $5, 000 40, 000 Shares = $0. 125 per share If 10, 000 shares are repurchased on April 1, 2015, only 40, 000 shares would be outstanding from April 1 – June 30, 2015. 11 -79
E 11 -17 Determining the Effect of a Stock Repurchase on EPS and ROE Required: 2. Assume SPI repurchases 10, 000 shares of its common stock at a price of $2 per share on April 1, 2015. Also assume that during the quarter ended June 30, 2015, SPI reported Net Income of $5, 000, and declared and paid cash dividends totaling $5, 000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2015. ROE $5, 000 = = ($100, 000 +80, 000)/2 5. 6 percent 10, 000 shares are repurchased for $20, 000 on April 1, 2015, resulting in a Stockholders’ Equity balance of $80, 000 from April 1 – June 30, 2015. 11 -80
E 11 -17 Determining the Effect of a Stock Repurchase on EPS and ROE Required: 3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a stock repurchase on EPS and ROE? By repurchasing stock, a company can increase both its EPS and ROE. 11 -81
End of Chapter 11 11 -82
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