ch 15: Shareholders Equity

preferred shares

a special class of shares, which have certain preferential rights and privileges.

large stock dividends

a stock dividend of more than 20% to 25% of the number of shares previously outstanding is called a large stock dividend.

price earnings ratio

calculated by dividing the share's market price by the earnings per share.

trading on the equity

describes the practice of using borrowed money at fixed interest rates or issuing preferred shares with constant dividend rates in hopes of obtaining a higher rate of return on the money used. leveraging.

legality of dividend distribution

no amounts may be distributed among the owners unless the corporate capital is kept intact. there has be sufficient net assets or security left in the corp to satisfy the lability holders after any assets have been distributed to shareholders as dividends. various tests of corp solvency have been used over the years. under the cbca, dividends must not be declared or paid if there are reasonable grounds for a. the corp is or would be after the dividend, unable to pay it's liabilities as they become due. or b. the realizable value of the corp's assets would as a result of the dividend be less than the total of it's liabilities and stated or legal capital for all classes of its shares.

treasury shares

once shares are reacquired they may either be retired or held in the treasury for reissue, which is called this:

liquidating dividends

one of 2 classes of dividends: those that are a return of capital, referred to as this:

dividends

profit distribution method for corporations. these are controlled by certain legal restrictions, not all shares carry the right to receive dividends.

common shares

represent the residual ownership interest in the company suffer the ultimate risks of losses and receive the benefits of success. a common shareholder is not guaranteed annual dividends and is not guaranteed assets upon dissolution of the corporation.

legal capital

same as stated capital

participating (preferred shares)

share at the same rate as common shareholders, in any profit distributions that are higher than the prescribed rate of the preferred share. Ex: a 5% preferred share will receive a 5% return but also dividends at the same rate that is paid to common shareholders if the latter are paid amounts higher than 5% of stated value.

in substance common shares

shares that even tho they have the same characteristics as common shares, cannot be or not called common shares for legal purposes.

par value shares

shares that have a fixed per share amount printed on each share certificate are called these:

preemptive right

the CBCA allows a corporation to assign a fourth right, the right to share proportionately in any new issues of shares of the same class.

retractable (preferred shares)

the holders of the shares can put or sell their shares normally after having given adequate notice and the company must then pay the holders for the shares.

callable/redeemable (preferred shares)

the issuing corp can call or redeem at its option thru its own choice, the outstanding preferred shares at specified future dates and at stipulated prices. the callable feature permits the corp to use the capital that it has obtained thru the issuance of such shares until the need has passed or having the issued shares is no longer an advantage. when a preferred share is called for redemption any dividends in arrears must be paid.

payout ratio

the ratio of cash dividends to net income. if preferred shares are outstanding, this ratio is calculated for common shareholders by dividing cash dividends paid to common shareholders by net income available to common shareholders.

convertible (preferred shares)

this feature allows the company or holder to exchange the shares for common shares at a predetermined ratio. Thus the shareholder has the relative security of the preferred share yet may gain from the appreciation of the company by converting preferred shares to common shares.

rate of return on shareholder's equity

this ratio shows how many dollars of net income were earned for each dollar invested by the owners. calculated by dividing net income less preferred dividends by average common shareholder's equity.

lump sum sales

two or more classes of securities are issued for a single payment. arises an accounting problem is the allocation of proceeds among the several classes of securities or determining how to measure the separate classes of shares.

limited liability

when investors may lose their investment but they cannot lose more than their investment.

leveraged buyout

which is when management or another employee group purchases the company shares and finances the purchase by using the company assets as collateral.

4 characteristics of in substance common shares

1. subordination: shares do not have a preferred rank over other shares for dividends distributions or for the distribution of company assets upon wind up of company. 2. risks and rewards of ownership: share participate in the earnings/lossess of the company and appreciation/depreciation of the company. 3. obligation to transfer value: no obligation to transfer value, given that they represent a residual interest in the company, they have value only if the company's net assets have value. 4. redemption: the shares are retractable/redeemable only upon windup of the company.

cumulative (preferred shares)

dividends on these shares that are not paid in any given year are known as dividends in arrears and must be made up in a later year before any profits can be distributed to common shareholders. there is no liability however until the board of directors declares a dividend. according to common law, if the corporate charter is silent about the cumulative feature the preferred share is considered cumulative.

dividends in kind

dividends that are payable in corp assets other than cash are called property dividends, or these.

basic or inherent rights

each share has its own rights and privileges restricted only by the articles of incorporation. if there are no restrictions then the following are the basic rights: 1. to share proportionatley in profits and losses. 2. to share proportionately in management (that is the voting rights for directors) 3. to share proportionately in corporate assists upon liquidation of the corporation.

stock dividend

earnings of a business are retained on a perm basis. no assets are distributed and each shareholder has exactly the same proportionate interest in the corporation and the same total book value.

retained earnings

earnings retained for the use in business, basic source is from operations.

stock split

from a legal standpoint, this is distinguished from a stock dividend because these results in an increase in the number of share outstanding with no change in share capital or retained earning amounts.

subscribed shares

generally occur when new, small companies go public or when corporations offer shares to employees so they can participate in the business ownership

book value per share

is calculated by dividing common shareholder's equity by the number of common shares outstanding.

earned capital

is the capital that is created by the business operating profitably. it consists of all undistributed income that remind invested in the enterprise. it's important to distinguish between this and paid in capital.

accumulated other comprehensive income

is the cumulative change in equity that is due to the revenues and expenses and gains and losses that stem from non shareholder transactions that are excluded from the calculation of net income. Considered to represent earned income as well.

contributed (paid in) capital

is the total amount that shareholders provide to the corp for it to use in the business.