Chapter 10 Stockholders Equity McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Stockholders Equity Stockholders Equity = Assets - Liabilities Primary Sections of Stockholders Equity Paid-in capitalRetained EarningsTreasury Stock Amount stockholders have invested in the corporation Amount of earnings the corporation has retained Corporations own stock that it has reacquired 10-2

Part A Invested Capital 10-3

LO1 Corporations oArticles of incorporation (or corporate charter) describe a)the nature of the firms business activities b)the shares to be issued c)the initial board of directors oCorporations stockholders control the corporation - By voting their shares, they determine the makeup of the board of directors - which in turn appoints the management to run the corporation. 10-4

Public or Private Stocks trade on a stock exchanges such as NYSE, AMEX, NASDAQ; or by over-the-counter (OTC) trading. Regulated by the Securities and Exchange Commission (SEC) Examples – Wal-Mart, Microsoft, Intel Does not allow investment by the general public and has fewer stockholders Not regulated by the Securities and Exchange Commission (SEC) and do not need to file financial statements with it Examples - Cargill (agricultural commodities) Koch Industries (oil and gas), Chrysler (cars) Corporations may be either public or private PublicPrivate 10-5

Advantages and Disadvantages of a Corporation Additional taxes More paperwork Limited liability Ability to raise capital Lack of mutual agency Advantages Disadvantages 10-6

LO2 Common Stock Type of Stock Definition Authorized Shares available to sell (issued and unissued) Issued Shares actually sold (includes treasury stock) Outstanding Shares held by investors (excludes treasury stock) Authorized – Unissued = Issued Issued – Treasury Stock = Outstanding oIf a corporation has only one kind of stock, it usually is labeled as common stock. 10-7

LO3 Preferred Stock Usually have first rights to a specified amount of Dividends. Receive preference over common stockholders in the distribution of assets in the event the corporation is dissolved. Factor Common Stock Preferred StockBonds Voting rightsYesUsually NoNo Risk to the investorHighestMiddleLowest Expected return to the investor HighestMiddleLowest Risk of contract violationsLowestMiddleHighest Preference for paymentsLowestMiddleHighest Tax deductibility of paymentsNoUsually NoYes Comparison of common stock, preferred stock, and bonds 10-8

Features of Preferred Stock Flexibility allowed in its contractual provisions ConvertibleRedeemableCumulative Shares can be exchanged for common stock Shares can be returned to the corporation at a fixed price Shares receive priority for future dividends, if dividends are not paid in a given year 10-9

LO4 Treasury Stock Why corporations repurchase their stock To boost under-priced stock. To distribute surplus cash without paying dividends. To boost earnings per share. To offset issuance of shares under stock- based compensation plans. A corporations own stock that it has reacquired 10-10

Part B Earned Capital 10-11

LO5 Retained Earnings and Dividends RETAINED EARNINGS o Represents the earnings retained in the corporation – earnings not paid out as dividends to stockholders. oEquals all net income, less all dividends, since the corporation began. oHas a normal credit balance consistent with other stockholders equity accounts. oIf losses exceed income since the corporation began, retained earnings will have a debit balance and is called an accumulated deficit

LO6 Stock Dividends and Stock Splits Sometimes, corporations distribute to shareholders additional shares of the companies own stock rather than cash. These are known as stock dividends or stock splits depending on the size of the stock distribution. You own 100 shares and assume a You will get 10% stock dividend10 additional shares 20% stock dividend20 additional shares 100% stock dividend100 additional shares Small stock dividend Large stock dividend or stock split (2-for-1) 10-13

Part C Reporting and Analyzing Stockholders Equity 10-14

LO8 Equity Analysis Equity Analysis Return on Equity Return on the Market Value of Equity Price-Earnings Ratio Earnings Per Share 10-15

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