ACC 210 Chapter 10

Features of Preferred Stock

1) Convertible - Shares can be exchanged for common stock 2) Redeemable - Shares can be returned to the corporation at a fixed price 3) Cumulative - Shares receive priority for future dividends, if dividends are not paid in a given year

Stages of Equity Financing

1) Investment by the founders of the business 2) Investment by friends and family of the founders 3) Outside investment by "angel" investors and venture capital firms 4) Initial public offering

Accumulated Deficit

A debit balance in Retained Earnings (when losses exceed income and the retained earnings are not at its normal credit balance). Subtract an accumulated deficit from total paid-in capital in the balance sheet to arrive at total stockholders' equity

S corporation

Allows a company to enjoy limited liability as a corporation and tax treatment as a partnership. Cannot have more than 100 stockholders

Corporation

An entity that is legally separate from its owners and even pays its own income taxes. Formed in accordance with the laws of individual state.

No-par value stock

Common stock that has not been assigned a par value. Most new corporations and even some established corporations issue these.

Total stockholder's equity

Consists of total paid-in capital, retained earnings, and treasury stock. It is increased by paid-in capital and retained earnings and reduced by treasury stock.

Issues no-par value common stock ...

Debit Cash and credit Common Stock

Issues par-value stock...

Debit Cash, credit Common Stock by number of shares times par value AND credit Additional Paid-in Capital by the difference

Privately held corporation

Does not allow investment by the general public and normally has fewer stockholders than a public corporation. Do not need to file financial statements with the SEC.

Disadvantages of a corporation

Double taxation and more paperwork

Seasoned Equity Offerings (SEOs)

Future stocks issued by the company

Recording treasury stock...

Increasing treasury stock is a debit to Treasury Stock and a credit to Cash. Record treasury stock at the cost of the shares reacquired. Reduces stockholder's equity on the balance sheet. When reissuing the treasury stock, we report the difference between its cost and the cash received as an increase or decrease in additional paid-in capital.

Price-earnings ratio (PE ratio)

Indicates how the stock is trading relative to current earnings. Stock price divided by earnings per share

Preferred Stock

Is "preferred" over common stock in two ways: 1)Usually have first rights to a specific amount of dividends - receive designated dividend before common shareholders receive any 2) Preferred stockholders receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved However, most don't have voting rights

Return on the market value of equity...

Is computed as net income divided by the market value of equity

Advantages of a corporation

LImited liability and the ability to raise capital and transfer ownership

Return on Equity (ROE)

Measures the ability of company management to generate earnings from the resources that owners provide. Net income divided by average stockholders' equity.

Earnings per share (EPS)

Measures the net income earned per share of common stock. Net income minus dividends on preferred stock divided by average shares of common stock outstanding. Useful in comparing earnings performance for the same company over time.

Stockholder Rights

Owners of the corporation and have certain rights: the right to vote (including electing the board of directors), the right to receive dividends, and the right to share in the distribution of assets if the company is dissolved.

Venture Capital Firms

Provide additional financing, often in the millions, for a percentage of ownership in the company.

Small Stock Dividends

Recorded at market value, not par value per share

SE Section on Balance Sheet vs. Statement of SE

SE section on balance sheet presents the balance of each equity account at a point in time while the statement of stockholders' equity shows the change in equity account balance over time.

Value Stocks

Stocks that are priced low in relation to current earnings

Growth Stocks

Stocks whose future earnings investors expect to be higher.

Invested Capital

The amount of money paid into a company by its owners.

Paid-in capital

The amount stockholders have invested in the company

Treasury Stock

The corporation's own stock that it has reacquired

Declaring/Paying Cash Dividends....

The declaration of cash dividends decreases Retained Earnings and increases Dividends Payable. The payment of cash dividends decreases Dividends Payable and decreases Cash. The net effect, then, is a reduction in both Retained Earnings and Cash.

Retained Earnings

The earnings NOT paid out in dividends

Initial Public Offerings (IPOs)

The first time a corporation issues stock to the public

Par Value

The legal capital per share of stock that's assigned when the corporation is first established. Today it has no relationship to the market value of the common stock.

Issued Stock

The number of shares that have been sold to investors. A company usually does not issue all its authorized stock.

Articles of incorporation

The state incorporation laws guide corporations as they write these. (Sometimes called corporate charter). Describe a) the nature of the firm's business activities b) the shares of stock to be issued c) the initial board of directors - establishes corporate policies and appoints officers who manage the corporation

Publicly held corporation

The stock that trades on NYSE or NASDAQ, or by the OTC trading. Regulated by SEC

Why corporations repurchase their stock:

To boost underpriced stock, to distribute surplus cash without paying dividends, to boost earnings per share, to satisfy employee stock ownership plans

Stock Dividend/Stock Split

Total assets, total liabilities, and total stockholders' equity do not change as a result of a stock dividend. Doing this lowers the trading price of the stock to a more acceptable trading range, making it attractive to a larger number of potential investors. Like cutting a pizza into more slices, everyone has more shares, but each share is worth proportionately less than before.

Organization chart

Traces line of authority for a typical corporation. Stockholders to Board of Directors to CEO to all the VPs.

Stated Value

Treated and recorded in the same manner as par value shares

Dividends in arrears

Unpaid dividends

Angel Investors

Wealthy individuals in the business community (like the people on Shark Tank!) willing to risk investment funds on a promising business venture

Property Dividend

When a noncash asset is distributed to stockholders. Most often these are securities held as investments

Allocating Dividends Between Preferred and Common Stock

pg. 467

Treasury Stock

repurchased shares that are included as part of shares issued, but excluded from shares outstanding

Outstanding Stock

the number of shares held by investors. Issued and outstanding shares are the same as long as the corporation has not repurchased any of its own shares.

Authorized Stock

the total number of shares available to sell, stated in the company's articles of incorporation. Not recorded in the accounting records, but the corporation is required to disclose in the financial statements the number of shares authorized.