EQUITY FINANCING SHAREHOLDERS EQUITY CHAPTER 18 LEARNING OBJECTIVES

* EQUITY FINANCING * SHAREHOLDERS’ EQUITY CHAPTER 18

* LEARNING OBJECTIVES 1. Overview of Corporation (General) 2. Cash and Property dividends 3. Stock dividends and Stock splits 4. Treasury Stock transactions 5. Stock rights and warrants 6. Financial Statement Presentation

* The Model Business Corporation Act Corporate Charter • Nature and location of business activities. • Number and classes of shares authorized. Articles of incorporation are filed with the state. State issues a corporate charter. Shares of stock issued. Professor Vedd Board of directors appoint officers. Board of directors elected by shareholders.

* Preemptive right to maintain percentage ownership (proportional interest) Right to vote. Right to share in profits when dividends are declared. Right to share in distribution of assets if company is liquidated. 4 Professor Vedd

* Authorized Shares Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that have never been sold. 5 Professor Vedd

* Outstanding shares are issued shares that are owned by shareholders. Authorized Shares Issued Shares Outstanding Shares Unissued Shares Treasury shares are issued shares that have been reacquired by the corporation. Treasury Shares 6 Professor Vedd

* Outstanding shares are issued shares that are owned by stockholders. Authorized Shares Outstanding Shares Unissued Shares Retired shares assume the same status as authorized but unissued shares. Retired Shares 7 Professor Vedd

* Legal capital is. . . Par value stock No-par stock *Designated dollar *Dollar amount per share not designated in corporate charter. amount per share stated in the corporate charter. *Corporations can assign a stated value per share (treated as if par value). *Par value has no relationship to market value. 8 Professor Vedd

* Common stock is the basic voting stock of the corporation. It ranks after preferred stock for dividend and liquidation distribution. Dividends are determined by the board of directors. Usually has a par or stated value. Generally does not have voting rights. Preferred Stock Dividend and liquidation preference over common stock. Professor Vedd May be convertible, callable, and/or redeemable.

* Rights given up by preferred stockholders: 1. Voting rights (No) 2. Sharing in success- Cash dividends received by Stockholders are usually fixed in amount. Preferred E. g. Co issued 5, 000 preferred shares of 7%, $100 par value (each $100 share pays a $7. 00 dividends (100 x. 07) Rights enjoyed by preferred stockholders: 1. Cash dividend preference 2. Liquidation preference 10 Professor Vedd

* • • • Are usually stated as a percentage of the par or stated value. May be cumulative or noncumulative. May be partially participating, fully participating, or nonparticipating. Unpaid dividends must be paid in full before any distributions to common stock. Dividends in arrears are not liabilities, but the per share and aggregate amounts must be disclosed. Professor Vedd

* Convertible exchange preferred stock for common stock. Callable issuing company to redeem the preferred stock. Redeemable holder to redeem The stock—usually with some restrictions. 12 Professor Vedd

* Amounts invested by shareholders Shareholders’ Equity Paid-in Capital (Capital Stock) Retained Earnings Accumulated 13 Other Comprehensive Income Professor Vedd Amounts earned by corporation Other gains and losses not included in comprehensive net income

* Net holding gains (losses) on investments. Deferred gains (losses) from derivatives. Net unrecognized loss on pensions. 14 Professor Vedd Gains (losses) from foreign currency translations.

Balance Sheet Reporting The accumulated amount of comprehensive income is reflected in the Equity section of the balance sheet in two ways: • • Net income (less dividends) is cumulated in retained earnings. Other comprehensive income is cumulated in accumulated other comprehensive income. 13 -15 Professor Vedd

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* Issuing Stock for Noncash Assets Apply the general valuation principle by using fair value of stock given up or fair value of asset received, whichever is more clearly evident. If market values cannot be determined, use appraised values. Professor Vedd

* Share Issue Costs • Registration fees • Underwriter commissions • Printing and clerical costs • Legal and accounting fees • Promotional costs Share issue costs reduce net proceeds - resulting in a lower paid-in capital. ABC Issued 100 shares $1 par at 1. 50 with issue cost $10 Dr. Cash 140 (150 -10) cr. C Stock 100 (100 x 1) cr. PIC –CS 40 {(100 x. 50)-10} Professor Vedd

Property Dividends (2) Property Dividends payable in assets other than cash. Restate at fair value the property it will distribute, recognizing any gain or loss. 19 Professor Vedd

* Stock dividends result in more shares being issued as dividend (no assets are involved) Distribution of corporate earnings ARB 43: Transfer from RE/PIC At FMV Types of Dividends Small Dividend Large dividend Less than 20 - 25% shares More than 20 - 25% shares Use par value Use FMV at declaration 20 Professor Vedd

* Stock Splits Stock splits change the par value per share and the number of shares outstanding, but the total par value is unchanged, and no journal entry is required. Assume that a corporation had 3, 000 shares of $2 par value common stock outstanding before a 2–for– 1 stock split. Increase Decrease No Change Professor Vedd

* Stock Dividends Stock Splits 1) Par value of a share 2) 3) 4) 5) 1) Par value of a share does not change Total number of shares increases Total stockholders’ equity does not change The composition of equity changes (less of retained earnings; more of stock) Stock dividends require journal entries decreases 2) Total number of shares increases 3) Total stockholders’ equity does not change 4) The composition of equity does not change (same amounts of stock and RE) 22 5) Stock splits do not Professor Vedd require journal entries

* Stock Splits Effected in the Form of Large Stock Dividends (at par)distributes a 2 -for-1 stock Matrix, Inc. declares and split effected in the form of a 100% stock dividend. The company has 1, 000, $1 par value common stock outstanding. The stock is trading in the open market for $14 per share. The per share par value of the shares is not to be changed. Retained Earnings …. . . . 1, 000 Common stock ……………. . ………………… 1, 000 To record declaration and distribution of 2 -for-1 stock split effected in the form of a 100% stock dividend. or Paid-in capital – excess of par common …. 1, 000 Common stock ……………. . ……………… 1, 000 Professor Vedd

* Share Buybacks A corporation might reacquire shares of its stock to. . . • • • support the market price. increase earnings per share. distribute in stock option plans. issue as a stock dividend. use in mergers and acquisitions. avoid takeover attempts. Professor Vedd

* Share Buybacks: Reacquired account for the reacquired shares by 1. Retiring Shares reacquired & formally retired: -reduce the proportionate originally capital created - Any difference in PIC –repurchase 2. Treasury shares (to reissue). Professor Vedd

* Treasury Stock: Concepts w Steps in treasury stock transactions: Initially, corporations issue stock from authorized stock Treasury stock: repurchase stock (from issued/outstanding) T/Stock may be retired or reissued Treasury Stock : CONTRA EQUITY ACCOUNT 26 Professor Vedd

Presentation and Analysis of Stockholders’ Equity 27 Professor Vedd

* *Overview of Corporation *Structure of shareholders’ equity *Type of stock *Issue of shares: cash/non-cash *Dividends: cash/stock/property *Retirement of stock *Repurchase of stock: Treasury stock *Presentation Professor Vedd