MGMT 200 Chapter 10

Invested capital

is the amount of money paid into a company by its owners.

Retained Earnings

Retained Earnings = All net income since the company began − All dividends since the company began •Earnings retained in the corporation and not paid out as dividends. A debit balance in Retained Earnings is called an accumulated deficit

Stock Dividends and Stock Splits 2

Stock split. •Reduces par value per share and increases shares outstanding; no need to record transaction. Large stock dividends. •Records a decrease in retained earnings and an increase in common stock; recorded at par value.

Public or Private Corporation

The stock of a publicly held corporation trades on the New York Stock Exchange (NYSE) or National Association of Securities Dealers Automated Quotations (NASDAQ), or by over-the-counter (OTC) trading. A privately held corporation does not allow investment by the general public and normally has fewer stockholders than a public corporation.

Stages of Equity Financing

To grow, companies seek investments from: •Angel investors - Wealthy investors, like those featured on the television show Shark Tank. •Venture capital firms - Provide additional funding and business expertise. •Initial public offering (I P O) - The first time a corporation issues stock to the general public.

Disadvantages of a Corporation

A corporation has two primary disadvantages relative to sole proprietorships and partnerships: additional taxes and more paperwork.

Advantages of a Corporation

A corporation offers two primary advantages over sole proprietorships and partnerships: limited liability and the ability to raise capital and transfer ownership.

Authorized, Issued, Outstanding, and Treasury Stock

Authorized Shares: available to sell (= Issued + Unissued) Issued Shares: actually sold (= Outstanding + Treasury) Outstanding: Shares issued and held by investors Treasury: Shares issued and repurchased by the company

Treasury Stock

Companies buy back their own stock for various reasons: •To boost underpriced stock. •To distribute surplus cash without paying dividends. •To boost earnings per share. •To satisfy employee stock ownership plans.

Purchase of Treasury Stock

Just as issuing shares increases stockholders' equity, buying back those shares decreases stockholders' equity. Rather than reducing the stock accounts directly, though, we record treasury stock as a separate "negative" or "contra" account. Treasury stock is reported as a contra equity, or negative amount, because treasury stock reduces total stockholders' equity.

Stockholder Rights

the right to vote (including electing the board of directors), right to receive dividends, right to share in the distribution of assets if the company is dissolved.

Features of Preferred Stock

•Convertible: shares can be exchanged for common stock. •Redeemable: shares can be returned to the corporation at a fixed price. •Cumulative: shares receive priority for future dividends if dividends are not paid in a given year. Preferred stockholders usually have first rights to a specified amount of dividends. Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved.Preferred stock usually is cumulative

Dividend Dates

•Declaration date: date on which board of directors declares the cash dividend to be paid. •Record date: specific date on which the company will determine who will receive the dividend (registered owners of stock). •Payment date: date of the actual cash distribution. Dividends are not paid on treasury shares.

Cash Dividends

•Distributions by a corporation to its stockholders. •A change in a quarterly or annual cash dividend paid by a company can provide useful information about future prospects. •Not all companies pay dividends; for example, growth companies prefer to reinvest earnings rather than distribute them.

Price-Earnings Ratio (PE ratio)

•Indicates how the stock is trading relative to current earnings. Price earnings ratio = stock price/earnings per share Price-earnings ratios commonly are in the range of 15 to 20. A high PE ratio indicates that the market has high hopes for a company's stock and has bid up the price

Par Value

•Legal capital per share of stock that's assigned when the corporation is first established. •Par value has no relationship to the market value of the common stock.

Dividend Yield

•Measures how much a company pays out in dividends relative to its share price. Dividend Yield = dividends per share / stock price

Earnings per Share

•Measures net income earned per share of common stock. Earnings per share = net income - dividends on preferred stock / (average shares of common stock outstanding) The key point is that earnings per share is useful in comparing either Alpha's earnings over time or Beta's earnings over time, but it is not useful in comparing the companies with each other.

Return on Equity

•Measures the ability of company management to generate earnings from the resources that owners provide. Return on equity = Net Income/ Average stockholders equity

Small Stock Dividends

•Recorded at market value, not par value. •Does not change total assets, total liabilities, or total stockholders' equity. •Decreases one equity account, Retained Earnings, increases two other equity accounts, Common Stock and Additional Paid-in Capital.

Stock Dividends and Stock Splits

•Stock dividends: additional shares of a company's own stock given to stockholders as dividends. •Stock split: a large stock dividend that includes a reduction in the par or stated value per share. Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend.