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Learning Objectives Understand the Business – LO1 Explain the role of shares (also called stocks) in financing a corporation. Study the accounting methods.

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Presentation on theme: "Learning Objectives Understand the Business – LO1 Explain the role of shares (also called stocks) in financing a corporation. Study the accounting methods."— Presentation transcript:

1 Learning Objectives Understand the Business – LO1 Explain the role of shares (also called stocks) in financing a corporation. Study the accounting methods – LO2 Explain and analyze common share transactions. – LO3 Explain and analyze cash dividends, stock dividends, and stock split transactions. – LO4 Describe the characteristics of preferred shares and analyze transactions affecting preferred shares. Evaluate the results – LO5 Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

2 Preferred Shares Preferred shares often have specified rights: © McGraw-Hill Ryerson. All rights reserved.2 LO4 No voting rights Fixed dividend rate Priority over common shares in dividends and liquidation

3 Preferred Share Issuance A company issues 10,000 preferred shares for $5 per share. LO4 © McGraw-Hill Ryerson. All rights reserved.3 1 Analyze 2 Record

4 Preferred Share Dividends LO4 © McGraw-Hill Ryerson. All rights reserved.4 A Preferred Share may have Current Dividend Preference, which requires that preferred dividends be paid before paying any common share dividends. Consider the following example: Preferred shares outstanding, 6%, book value $40,000; 2,000 shares Common shares outstanding, book value $50,000; 5,000 shares The company declares $8,000 dividends for 2011 and $10,000 dividends for 2012. Preferred Dividends of $40,000 x 6% are paid first. The remainder is paid to common shares.

5 Preferred Share Dividends LO4 © McGraw-Hill Ryerson. All rights reserved.5 A Preferred Share may have Cumulative Dividend Preference, which requires that any portion of preferred dividends not paid be accumulated as dividends in arrears, which must be paid before any future common dividends. The company declares dividends for 2009 $0; 2010 $0; 2011 $8,000; 2012 $10,000. 2011 total Preferred Dividends = $7,200 2011 total Common Dividends = $800 ($8,000 - $7,200) 2012 total Preferred Dividends = $2,400 2012 total Common Dividends = $7,600 ($8,000 - $2,400)

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