Chapter 11

outstanding shares

# of issued shares less the # of shares repurchased as treasury stock

stock rights/warrants specifies

-# of rights represented by the warrant -Option price per share (can be zero) -# of rights needed to obtain a share of stock -Expiration date of the rights -Instructions for the exercise of rights -price of stock reflects the value of rights -shares and rights trade separately

features of preferred stock

-Call feature Provides the issuer the right, but not obligation, to repurchase the preferred shares at a specified price -Conversion feature Allows preferred shareholders to convert their shares into common shares at their option at a predetermined conversion ratio -Participation feature Allows preferred shareholders to share ratably with common stockholders in dividends

contributed capital

-Cumulative cash inflows received from the issuance of various classes of stock -Less the net cash paid out to repurchase a company's own stock from the market Two classes of stock: -Common stock -Preferred stock -Additional paid-in capital (also labeled as Paid-in capital in excess of par)

preferred stock

-Generally has some preference, or priority, with respect to common stock Typical preferences: -Dividend preference Preferred shareholders receive dividends on their shares before common shareholders -Liquidation preference If a company fails, assets sold in liquidation go first to pay debtors, next to preferred shareholders, and finally to common stockholders

stock rights

-Give the holder an option to acquire a specified number of shares of capital stock under prescribed conditions and within a stated period -Evidenced by a certificate called a stock warrant reasons for issuance: To compensate outside parties for service provided As a preemptive right giving shareholders first chance to buy additional new shares issued To enhance the marketability of other securities issued by the company

sources of financing

-Possible sources of financing for companies: -Through creditors -Borrowing funds from debtholders -Through equity investors -Obtaining funds from shareholders -Through operating cash flows

earned capital

-Retained earnings -Cumulative profits and losses of the company less any dividends to shareholders, and -Accumulated other comprehensive income (AOCI) -Changes to equity which are not part of income and not reflected in retained earnings

accounting for stock dividends

-The percentage of outstanding shares to be distributed determines the accounting method to be used for stock dividends -small and large stock dividends

authorized shares

-The upper limit on the number of shares that the corporation can issue -Established in the articles of incorporation -Can be increased by affirmative shareholder vote

comprehensive income

-a more inclusive notion of company performance than net income -Includes all recognized changes in equity that occur during a period except those resulting from exchanges w/ owners -Includes effects that are outside management's control -Net income viewed as measure of management's performance -Includes net income plus... -Foreign currency adjustments -Unrealized changes in market values of available-for-sale securities and derivatives -Adjustments to pension and other benefit plans -Not closed to retained earnings at year end -Closed to a separate earned capital account called 'Accumulated Other Comprehensive Income' (AOCI)

stock dividends and splits

-additional shares of stock distributed to shareholders -stock dividends -retained earings is reduced -contributed capital is increased -stock splits -not a monetary transaction -no financial statement effects

Stock repurchase

-often called treasury stock -A company buys its own stock from investors at the market price -To reduce the number of shares outstanding in order to increase the value of possible undervalued stock -Sends a positive signal to the market that affects share price favorably -To offset the dilutive effects of an employee stock option program

common stock

-primary ownership unit in a company -Common shareholders have voting rights -Par value: -An arbitrary value often assigned to each share of stock -Specified in the corporate charter at the time the corporation is formed -Specifies the allocation of proceeds from stock issuances between common stock and additional paid-in capital on the balance sheet

stock transactions and cash flows

-reported as financing activities -no cash effects: stock dividends, stock splits; often used when cash is short

book value per share

-the net book value of a company that is available to common shareholders -(stockholders equity - preferred stock)/ # of common shares outstanding

accounting for stock issuances

-used to obtain cash and other assets for use in the business -creates an increase in assets and stockholders' equity -common or preferred stock account increases by: par value x number of shares sold -additional paid in capital account increases by: remainder of issue price -no effect on the IS

stock splits

A proportionate distribution of shares Similar in substance to a stock dividend A typical stock split is 2-for-1 Means that the company distributes one additional share for each share owned by the stockholders Normally requires par value to be reduced proportionately Some states prohibit reducing par value Called a stock split effected in the form of a dividend

accounting for convertible securities

Conversion option is valuable Yields a higher price than if not convertible Imposes a cost on common shareholders Accounting for issuance is same regardless if convertible or not One exception:If conversion option is detachable from the security Upon conversion Remove book value of converted security from the balance sheet Increase contributed capital from common stock

IFRS reporting insight

Convertible securities are termed compound financial instruments under IFRS Because the conversion feature has a value even if not legally detachable for sale IFRS splits convertible bonds into separate debt and equity values for reporting purposes

convertible securities

Debt and equity securities that provide the holder with the option to exchange the debt for a predetermined amount of common stock. Preferred shares that allow the holder to exchange them for a predetermined amount of common stock. Debt securities such as notes and bonds that gives the holder the option to convert the debt into common stock at a predetermined conversion price Convertible preferred stock Preferred shares that allow the holder to convert into common stock

Complex capital structure

Exists if dilutive securities are outstanding Dilutive securities Securities that can be converted into shares of common stock that would reduce/dilute earnings per share upon conversion Three primary types: Stock options Convertible debt Convertible preferred stock -requires diluted EPS be calculated and reported in addition to basic EPS

employee stock options

Give employees the right to receive shares of stock Vesting period Period of time during which the employee may not exercise the stock option Fair value of each stock option grant must be recognized as an expense on the income statement over the vesting period

large stock dividends

Greater than 20-25% Retained earnings reduced by par value of stock distributed

small stock dividends

Less than 20-25% Retained earnings reduced by market value of stock distributed

return on common equity (ROCE)

Measures the return on investment by common shareholders Similar to ROE except that the effect of preferred stock is removed from both numerator and denominator -ROCE = (net income - preferred dividends)/ avg common shareholders' equity

accounting for treasury stock

Never results in a gain or loss on the income statement Difference between the cost of the stock and the resale price is an adjustment to additional paid-in capital Treasury stock account is a contra stockholders' equity account Deducted from total stockholders' equity on the balance sheet

cumulative preferred stock

Preferred stock dividends have priority over common May be cumulative or non-cumulative Cumulative feature Unpaid prior years' dividends are paid to preferred shareholders before any payment for current year Dividend rate stated on stock certificates as percentage or dollar amount Percentage of par value, or Dollar amount per share -if percentage is 10% of par value at 50, you get 5

cash dividends

Reasons for dividend payments vary Most paid in cash Most are paid quarterly -not all companies pay dividends

EPS (earnings per share)

Reported on the face of the income statement At least one and potentially two EPS amounts are required -DILUTED AND BASIC EPS... (formula in PP)

earned capital

Represents the cumulative profit that has been retained by the company Increased by net income Decreased by net losses Decreased by dividends to shareholders Cash dividends Property dividends Stock dividends Includes positive and negative effects of accumulated other comprehensive income (AOCI)

using EPS

Value of EPS influenced by a number of factors Number of outstanding shares is controlled by management Net income can be influenced by management Analysts concentrate more on diluted EPS EPS is of limited use in evaluating operating performance

issued shares

actual number of shares that have been issued to shareholders

number of shares of stock

how many shares are there? -authorized shares -issued shares -outstanding shares