1. CHAPTER 15 Stockholders’ Equity: Contributed Capital ……..…………………………………………………………... Proprietorship Public Partnership Corporation Private Nonstock Stock Closed Listed OTC

2. THE CORPORATE FORM Incorporated in a single state Rights & privileges share profits & losses vote for directors share liquidation assets preemptive right Common stock: residual claim Preferred stock: often a prior, but limited, claim to earnings Limited liability Dividends from retained earnings approved by the board according to preference

3. CORPORATE CAPITAL  capital stock (common or preferred)  additional paid-in capital  retained earnings Par Value Stock  par value is generally low: no contingent liability for discount; tax benefits

4. No-Par Stock  issued without a premium or discount  some states require no-par stock to have a minimum stated value

5. Lump Sum Sales  two or more classes of stock issued together Proportional Method  lump sum is allocated based on relative market value of each class Incremental Method  book value = market value for the class with a known market value  remainder of lump sum is allocated to the class with no known market value

6. Example Evans Corp. issues 10,000 bonds ($500 par, 12%) and 100,000 shares of common stock ($5 par) for $8,800,000. Incremental Method Assume the market rate on the bonds is 12% and the market value of the stock is unknown.

7. Proportional Method Assume the market rate on the bonds is 12% and the market value of the stock is $40. Mkt ValueBook Value Bonds$5,000,000$8,800,000 x 5/9$4,888,889 Stock4,000,000$8,800,000 x 4/93,911,111

8. Stock Issued for Noncash Consideration  use the fair market value of the stock or the fair market value of the consideration, which either is clearer  independent appraisal, if necessary  do not use par value as a basis  do not use book value of treasury stock as a basis Costs of Issuing Stock  reduction on Additional Paid-in Capital

9. Reacquisition of Stock  a form of distribution to stockholders  tax advantages  improves some ratios (eg. EPS)  to block a takeover Example Konar Corp issues 50,000 shares of $3 par common stock for $750,000.

10. The firm purchases 10,000 shares of common stock ($3 par value) for $30/share. The stock was originally issued for $15 per share. Cost Method Resold 2,000 treasury shares at $32/share.

11. Retired 8,000 treasury shares.

12. PREFERRED STOCK  cumulative preferred  dividends in arrears must be paid before any distribution to common stockholders  participating preferred  or partially participating  convertible preferred  to common at stockholders’ option  callable preferred  redeemable at option of the firm

14. DIVIDEND POLICY Legal Issues  solvency requirement  some states limit to retained or current earnings  some states limit to fair value of net assets Legal Issues  solvency requirement  some states limit to retained or current earnings  some states limit to fair value of net assets Economic Issues  liquidity  future cash needs Economic Issues  liquidity  future cash needs Communication Issues  smooth dividend stream (Kellogg Co.)  disclosure of dividend policy Communication Issues  smooth dividend stream (Kellogg Co.)  disclosure of dividend policy

15. Date of Declaration Cash Dividends Date of Record Date of Distribution

16. Property Dividends  most common form: securities  record at fair value of assets transferred  recognize gain or loss on assets at time dividend is declared

17. Date of Declaration Liquidating Dividends  dividends not based on retained earnings  a return of stockholders’ investment; reduction in paid-in capital  must be clearly explained to stockholders Date of Payment

18. Date of Declaration Stock Dividends  to capitalize part of earnings  proportionate interests remained unchanged  record at fair market value is less than 20-25% Date of Distribution

19. Date of Declaration Large Stock Dividends  more than 20-25%  usually reduces the market value of the stock  record at par value of stock issued Stock Split  no entry recorded  no. of shares  ; par value per share 

20. AssetsLiabS/E Pd-in Capital R/E Net Income Exercise 15-11

21. AssetsLiabS/E Pd-in Capital R/E Net Income Exercise 15-11 (cont.)

22. AssetsLiabS/E Pd-in Capital R/E Net Income Extras Recorded increase in value of investment. Declared a property dividend. Distributed the property dividend.

23. AssetsLiabS/E Pd-in Capital R/E Net Income Purchase of treasury stock Retirement of treasury stock Sale of common stock above par

24. Dividend Preferences Exercise 15-22 7% preferred, $10 par, 20,000 shares out$ 200,000 Common, $100 par, 30,000 shares out3,000,000 Retained earnings630,000 PreferCommonBalance $366,000 One year arrears$ 14,000352,000 Cumulative, participating

25. PreferCommonBalance $366,000 PreferCommonBalance $366,000 Noncumulative, nonparticipating Noncumulative, participating beyond 10% to common

26. RETAINED EARNINGS  income kept for use in the business  to finance expansion  increased by net income; decreased by dividends  prior period adjustments made directly to retained earnings  legal or contractual restrictions placed on retained earnings should be disclosed in the footnotes

27. Comm Stock Add Pd-in R/E Accum Other Comp I Total SE Balance, 12-31-01$ 150$1,050$3,000$ 80$4,280Net Income 700 Unrealized Gain 30 Cash Dividends (130) Repurch & retirement of common stock (10)(70)(40)(120) Balance, 12-31-02$ 140$ 980$3,530$ 110$4,760 Statement of Stockholders’ Equity

28. Rate of Return on Common Stock Equity Net Income - Preferred Dividends Average Common SE = Payout Ratio Cash Dividends to Common Net Income - Preferred Dividends = Analysis  a profitability measure  payout ratios have been declining for several yrs Income available to common stockholders SE less par value of preferred stock

29. Price Earnings Ratio Market Price of Stock Earnings per Share = Book Value per Share Common Stockholders’ Equity Outstanding Shares =  ratio commonly used by analysts  P/E ratios were very high for many firms in the late 1990s Stockholders’ equity - par value of preferred stock - dividends in arrears - preferred dividends for current year