BMGT 220, Chapter 11 Discussion Kristian Sooklal (cell) | (text)

Plan for today Chapter 10 quiz Cost of borrowing question: Total Cost of Borrowing = Total Interest over life of Bond + Discount OR Total Cost of Borrowing = Total Interest over Life of Bond - Premium Cover lecture material on Chapter 11 Cover Chapter 11 Practice Quiz See website for updates: –

Quiz Averages Syllabus – 9.37 Chapter 1 – 7.85 Chapter 2 – 8.2 Chapter 3 – 7.35 Chapter 5 – 5.91 Chapter 6 – 5.85 Chapter 8 – 5.19 Chapter 9 – 10 Chapter ? Overall:

Stock Split Reduces the market value of shares. No entry recorded for a stock split. Decrease par value and increase number of shares. Stock Splits

Illustration: Assume Daisy Corporation splits its 50,000 shares of common stock on a 2-for-1 basis. Results in a reduction of the par or stated value per share. Stock Splits

Microsoft's initial public offering (IPO) was March 13, 1986 SplitPayable DateSplit TypeEquivalent # of Shares FirstSept. 18, for 11 x 2 = 2 SecondApril 12, for 12 x 2 = 4 ThirdJune 26, for 24 x 1.5 = 6 FourthJune 12, for 26 x 1.5 = 9 FifthMay 20, for 19 x 2 = 18 SixthDecember 6, for 118 x 2 = 36 SeventhFebruary 20, for 136 x 2 = 72 EighthMarch 26, for 172 x 2 = 144 NinthFebruary 18, for 1144 x 2 = 288 Price of 1 share of Microsoft common stock on March 13, 1986 = $28.00 Price of 1 share of Microsoft common stock on April 10, 2013 = $30.12 This means, 1 share of Microsoft in 1986 = 288 shares today So, an investment of $28 on March 13, 1986 = $8,672 on April 10, 2013 The Implication of Stock Splits

BERKSHIRE HATHAWAY, Inc. Class A (CEO: Mr. Warren Edward Buffet) Stock price on October 14, 1976 = $67 Stock price on April 10, 2013 = $158,846 (Shares outstanding = 1.65 million) What happens when a stock does NOT split?

Key Topics in Chapter 11 Characteristics of a corporation: – Separate Legal Existence – Limited Liability of Stockholders – Transferable Ownership Rights – Ability to Acquire Capital (through stocks) – Continuous Life (going concern) – Corporation management – Regulations – Corporate Tax Common Stock – Authorized (the maximum shares the company can sell) – Issued (all common stock that has ever been sold by company) – Outstanding (shares that are owned by external investors)

Key Topics in Chapter 11 (Continued) Par value: arbitrary value which is usually quite low – See Google example from lectures Market value: no relation to par value – What the stock is currently selling for in the “market” No par value stock: – Sometimes have a “stated value”, which is pretty much the same thing – Some stock have no par value and no stated value Recorded at cost Issuance of stock at par for cash: Cash 1000 Common Stock1000 Issuance of stock with no par, no stated value for cash: Cash1000 Common Stock1000

Key Topics in Chapter 11 (Continued) Issuance of stock above par: Cash1800 Common Stock (at par)1000 Paid-in capital in excess of par value, common stock 800 Issuance of stock above stated value: Cash1800 Common Stock 1000 Paid-in capital in excess of stated value, common stock 800 Treasury Stock (contra-equity) Purchased: Treasury Stock 980 Cash 980 – Note that par value of the stock is irrelevant Sale of Treasury Stock above Cost Cash 2000 Treasury Stock(at cost)980 Paid-In Capital from Treasury Stock 1020

Key Topics in Chapter 11 (Continued) Sale of Treasury Stock Below Cost (assuming sufficient Paid-In Capital, from Treasury Stock): Cash960 Paid-In Capital from Treasury Stock 20 Treasury Stock980 Sale of Treasury Stock Below Cost (with no Paid-In Capital, from Treasury Stock) Cash900 Retained Earnings80 Treasury Stock 980 Sale of Treasury Stock Below Cost (with some Paid-In Capital, but not enough) Cash800 Retained Earnings100 Paid In Capital from Treasury Stock80 Treasury Stock980

Key Topics in Chapter 11 (Continued) Preferred Stock – Get Dividends First #1: Noncumulative – Only get dividends in current year when dividends are paid – Any dividends owed from previous years do NOT accumulate #2: Cumulative (dividends in arrear) – Must be paid all dividends owed from all years of holding stock before common stock holders can be paid – Dividends owed from previous years DO accumulate Cash Dividends (only applies to outstanding shares) Declaration Date: Cash Dividends Dividends Payable98001 Record Date (no entry): Payment Date: Dividends Payable98001 Cash98001

Key Topics in Chapter 11 (Continued) Stock Dividends (small stock dividend) Declaration Date: Stock Dividends (market value) Common Stock Dividends Distributable (par value) Paid-In Capital In Excess of Par value Payment Date: Common Stock Dividends Distributable Common Stock

Key Topics in Chapter 11 (Continued) Stock Dividends (large stock dividend) Declaration Date: Stock Dividends (par value) Common Stock Dividends Distributable (par value) Payment Date: Common Stock Dividends Distributable Common Stock Stock Split: – Number of shares increases by some amount – Par Value decreases inversely proportionally – No effect on total paid-in capital, no effect on retained earnings, no effect on total stockholder’s equity – No journal entry