EQUITY FINANCING

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EQUITY FINANCING
SHAREHOLDERS EQUITYCHAPTER 18
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LEARNING OBJECTIVES

• Overview of Corporation (General)
• Cash and Property dividends
• Stock dividends and Stock splits
• Treasury Stock transactions
• Stock rights and warrants
• Financial Statement Presentation

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The Model Business Corporation Act

• Nature and location of business activities.
• Number and classes of shares authorized.
• Number and classes of shares authorized.

Corporate Charter
Board of directors appoint officers.
State issues a corporate charter.
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Fundamental Share Rights
Preemptiveright to maintainpercentageownership
(proportional interest)
Rightto vote.
Right to sharein distribution ofassets if
companyis liquidated.
Right to sharein profits when dividends
aredeclared.
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Authorized, Issued, and Outstanding Capital Stock
Issued shares are authorized shares of stock that
have been sold.
Unissued shares are authorized shares of stock
that have never been sold.
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Authorized, Issued, and Outstanding Capital Stock
Outstanding Shares
Unissued Shares
Treasury Shares
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Authorized, Issued, and Outstanding Capital Stock
Outstanding Shares
Unissued Shares
Retired Shares
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Capital Stock Legal capital is . . .Types
Common Preferred

• Par value stock
• Designated dollar amount per share stated in the
  corporate charter.
• Par value has no relationship to market value.

• No-par stock
• Dollar amount per share not designated in
  corporate charter.
• Corporations can assign a stated value per share
  (treated as if par value).

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Capital Stock
Common stock is the basic voting stock of the
corporation. It ranks after preferred stock for
dividend and liquidation distribution. Dividends
are determined by the board of directors.
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PREFERRED STOCK

• Rights given up by preferred stockholders
• Voting rights (No)
• 2.Sharing in success- Cash dividends received by
  Preferred Stockholders are usually fixed in
  amount.
• E.g. Co issued 5,000 preferred shares of 7, 100
  par value
• (each 100 share pays a 7.00 dividends (100 x
  .07)
• Rights enjoyed by preferred stockholders
• Cash dividend preference-
• Liquidation preference-

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Preferred Stock Dividends

• Are usually stated as a percentage of the par
  or stated value.
• May be cumulative or noncumulative.
• May be partially participating, fully
  participating, or nonparticipating.

Unpaid dividends must be paid in full beforeany
distributions to common stock. Dividends in
arrears are not liabilities, but the pershare
and aggregate amounts must be disclosed.
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Types of Preferred Stock
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Sources of ShareholdersEquity
Amounts earnedby corporation
Amounts investedby shareholders
Shareholders Equity
Paid-in Capital (Capital Stock)
Retained Earnings
Accumulated OtherComprehensive Income
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Comprehensive Incomeincludes 4 types of
gains/lossesthat are traditionally excluded from
normal income
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Balance Sheet Reporting
The accumulated amount of comprehensive income is
reflected in the Equity section of the balance
sheet in two ways

• Net income (less dividends) is cumulated in
  retained earnings.
• Other comprehensive income is cumulated in
  accumulated other comprehensive income.

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Financial Reporting Overview
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Issuing Stock for Noncash Assets

• Apply the general valuation principle by using
  fair value of stock given up or fair value of
  asset received, whichever is more clearly
  evident.
• If market values cannot be determined, use
  appraised values.

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Share Issue Costs
Share issue costs reduce net proceeds- resulting
in a lower paid-in capital.
ABC Issued 100 shares 1 par at 1.50 with issue
cost 10 Dr. Cash 140 (150-10) cr. C
Stock 100 (100 x 1) cr. PIC CS 40
(100x.50)-10
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Property Dividends (2)

• Property Dividends
• Dividends payable in assets other than cash.
• Restate at fair value the property it will
  distribute, recognizing any gain or loss.

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Stock Dividends
Stock dividends result in more shares being
issued as dividend (no assets are involved)
Distribution of corporate earnings At FMV
ARB 43 Transfer from RE/PIC
Types of Dividends
Use par value
Use FMV at declaration
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Stock Splits
Stock splits change the par value per share and
the number of shares outstanding, but the total
par value is unchanged, and no journal entry is
required.
Assume that a corporation had 3,000shares of 2
par value common stock outstanding before a
2for1 stock split.
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Stock Dividends and Stock Splits
Stock Dividends
Stock Splits

1. Par value of a share does not change
2. Total number of shares increases
3. Total stockholders equity does not change
4. The composition of equity changes (less of
   retained earnings more of stock)
5. Stock dividends require journal entries

1. Par value of a share decreases
2. Total number of shares increases
3. Total stockholders equity does not change
4. The composition of equity does not change (same
   amounts of stock and RE)
5. Stock splits do not require journal entries

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Stock Splits Effected in theForm of Large Stock
Dividends (at par)
Matrix, Inc. declares and distributes a 2-for-1
stock split effected in the form of a 100 stock
dividend. The company has 1,000,000, 1 par value
common stock outstanding. The stock is trading in
the open market for 14 per share. The per share
par value of the shares is not to be changed.
Retained Earnings .................
1,000,000 Common stock
..1,000,000 To record declaration and
distribution of 2-for-1 stocksplit effected in
the form of a 100 stock dividend.
or
Paid-in capital excess of par common
.1,000,000 Common stock
.. 1,000,000
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Share Buybacks

• A corporation might reacquire shares of its
  stock to . . .
• support the market price.
• increase earnings per share.
• distribute in stock option plans.
• issue as a stock dividend.
• use in mergers and acquisitions.
• avoid takeover attempts.

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Share Buybacks Reacquired
Shares reacquired formally retired -reduce the
proportionate originally capital created - Any
difference in PIC repurchase
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Treasury Stock Concepts

• Steps in treasury stock transactions
• Initially, corporations issue stock from
  authorized stock
• Treasury stock repurchase stock (from
  issued/outstanding)
• T/Stock may be retired or reissued
• Treasury Stock CONTRA EQUITY ACCOUNT

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Presentation and Analysis of Stockholders Equity
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Chapter 18 Summary

• Overview of Corporation
• Structure of shareholders equity
• Type of stock
• Issue of shares cash/non-cash
• Dividends cash/stock/property
• Retirement of stock
• Repurchase of stock Treasury stock
• Presentation