201Lec11.

PPTX

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Corporations
Corporations and
and Stockholders
StockholdersEquity
Equity

CORPORATION is:
Separate Legal Entity created by law
- Enter into contracts
- Declare bankruptcy
- Corporation pays tax on net income
- Shareholders pay tax only if dividends are paid
- Continuous life

Not hard to form

- File for state charter
- Articles, By-laws, Initial stockholders
- Authorization to issue stock

The
The Corporate
Corporate Form
Form of
of Organization
Organization
Corporation - Legal Entity
Owned by

Stockholders-shareholders (publicly or privately-closely held)

Shares owned / Total Shares = % owned by each stockholder
Elect Representatives.

Board of Directors (BOD)

Control & Guide Business
Appoint Managers

Officers
CEO/ CFO / President / Vice President / Etc
Run day to day operations of business
and carry out BOD directions.

Advantages
Advantages of
of Incorporating
Incorporating
Protect shareholders personal assets
- Only investment in stock is at risk
- Enter risky businesses

Raise money
Tax planning
Ease of changing /
ownership

transferring

Disadvantages
Disadvantages of
of Incorporating
Incorporating
Regulations, paperwork
Tax traps (Double TAX)

Corp
earns $, pays tax. Pay out to shareholders, then they
pay tax again.

U Make It - We Take It
IRS

Alternatives
Alternatives to
to regular
regular corporate
corporate form:
form:
S corporation:
- 100 shareholder maximum
- Regular corporation first, then shareholders
elect subchapter S status with the IRS.
- Result: NO TAX paid by corporation on income.
- The catch: Shareholders must each claim their
share of corporate income on their tax returns even if
not
distributed via dividends to them.
- Dividend distributions are not taxable
- Called a flow through entity.

Alternatives
Alternatives to
to regular
regular corporate
corporate form:
form:
Limited Liability Company or Partnership
(LLC, LLP)
- Relatively new type of entity.
- Owner protection like corporations
- Set up process is similar to corporations
- Also flow through entities
- No maximum number of members
Also from chapter 1:
Sole
Proprietorship, General Partnership
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Stock
Stock of
of aa corporation:
corporation:
Stock must be authorized by state for sale.
Issued stock was sold,
traded to
shareholders.

given or

Outstanding means
owns it.

someone

Stock bought back from stockholders is

treasury stock.

COMMON
COMMON Stock
Stock
Generally, all corporations have some
common stock.
Typically each share has 1 vote for BOD.
Can have Par Value, Stated Value or No Par.
- This value has little meaning for common stock.
See preferred stock discussion though.
- Has nothing to do with market value.

EXAMPLE: Issue 500,000 shares for $55/share.

PAR VALUE (or stated value) is $1/share.
Cash
27,500,000
Common Stock
500,000
Paid-In-Capital in Excess of Par
(plug)
Note: If NO Par, NO Stated Value:
capital in excess of par is used. Credit all to
stock.

27,000,000

No paid in
common

BALANCE SHEET
Stockholders Equity
Paid in capital:
Common Stock
$ 500,000
Paid-In-Capital in Excess of Par
27,000,000
Total paid in capital
$27,500,000

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PREFERRED
PREFERRED Stock
Stock
Optional class of stock.
Preferential treatment over common stock:
~ Receive Liquidation assets before common stock.
~ Dividends received before common stock
Usually LARGE Par, FIXED dividend rate.
For preferred, par does affect: - dividend amount
- liquidation amount
- market price
If Cumulative feature, unpaid dividends accumulate
and are paid in the future.
(called
dividends in arrears)
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EXAMPLE:
* 100,000 shares of $100 par 5% cumulative Preferred.
* 500,000 shares of 10 cent par Common.

ASSUME $1,200,000 dividends in 2015, no payouts in 2014.

How much paid to preferred? To Common?
Preferred dividends = ($500,000 for 2013) + ($500,000 in
Arrears) = $1,000,000.
Common dividends = Left overs = $1,200,000 - $1,000,000
= $200,000.

Note dividends in arrears are not liabilities!

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STOCK VALUES:
Price per Share
Time
Preferred price hovers around par.
Common price bounces around, no relation to
par.
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TREASURY
TREASURYStock
Stock
Stock issued, then reaquired by corp.
- Buy out unhappy or retiring shareholders
- Use excess cash to reduce equity owners.
Fewer shareholders to deal with, maximize EPS.
- Increase or decrease take-overs.
Mergers,
acquisitions, buy-outs

Not an asset. Contra-Equity.

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EXAMPLE: Assume 1,000 shares in earlier example were

reacquired several years later for $70 per share.
Treasury Stock
70,000
Cash
70,000

BALANCE SHEET
Stockholders Equity
Paid in capital:
Common Stock
$
500,000
Paid-In-Capital in Excess of Par
27,000,000
Total paid in capital
$ 27,500,000
Retained Earnings
xxx,xxx,xxx
Less: Treasury Stock
( 70,000)
Total Stockholders Equity
$xxx,xxx,xxx
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Dividends
Dividends
Distributions to shareholders
- Cash
- Additional stock
- Other assets (excess inventory, personal
corporate assets, stock)

use of

Must be declared (announced) by BOD.

- Becomes a liability on declaration

Taxable income to shareholders, not

deductible by corporations.
- Exception: Stock dividends arent taxable

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Dividend
Dividend dates
dates Large
Large corporations
corporations

Dec 1: Retained earnings (or dividends)

Dividends payable
xxxx

xxxx

Dec 22: No entry. Stock price decreases. (trades ex-dividend)

Jan 20: Dividends payable
xxxx

xxxx

Cash

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STOCK
STOCK Dividends
Dividends
Shareholders get more stock.

- No assets are used

Say a company worth $1,200,000 has 100,000
shares of stock outstanding. Price per share =
$1,200,000 / 100,000 = $12.00.
Pay a 20% stock dividend.
Total shares now = 100,000 +
20,000 = 120,000.

Price per share will be

$1,200,000 / 120,000 = $10.00
Same pie, more slices
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Effect
Effect of
of stock
stockdividend
dividend on
on balance
balancesheet
sheet
Retained earnings reduced by value of stock
distributed.
Common stock increased by number of shares
distributed times par value per share.
Paid in capital in excess par increased.
NOTE: Net equity effect = $0
Stock price will decrease 20% at date of record.

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Why
Whybother
botherwith
with stock
stockdividends?
dividends?
Answer: Lower stock price to increase marketability
Think of supply, demand effect of price of a good.

EXAMPLE: Say a company worth $1 million has 100,000

shares.

After many successful years it is now worth $1 billion.

Original: $10/share

Now:$10,000/share!!

Total shareholder value

= shares x share price

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Stock
Stock SPLITS
SPLITS
Very similar to stock dividend
No journal entries.
New shares with different par value are traded
for old shares.
EXAMPLE:
100,000 shares of $1
par are split 2 for 1.
After split 200,000 shares of $0.50 par.
RESULTS: Balance sheet totals are all unchanged.
Stock price cut in half though!

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50:1
50:1 split
split -- Berkshire
Berkshire Hathaway
Hathaway
With the split, trading volume will likely increase, and that could attract a new
group of bigger and faster-trading investors. The B shares closed Friday at
$3,247, a lofty price that limited the kind of investors who bought the stock to
mostly those with a long-term performance view.
The price of the stock will be about $65 after the split. There will be no change to
the more exclusive Class A shares, which closed at $97,500 a piece Friday.
From Wall Street Journal 1/19/10

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Ratios:
Ratios: The
The PAYOUT
PAYOUT ratio
ratio
CASH DIVIDENDS DECLARED ON COMMON STOCK
NET INCOME

measures the percentage of earnings

distributed in the form of cash dividends to
common stockholders.
Income stock: High payout %
Growth stock: Low payout %

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Ratios:
Ratios: Return
Returnon
onCommon
CommonStockholders
StockholdersEquity
Equity
Net Income Preferred Stock Dividends
Average Common Stockholders Equity

...measures the profitability from the stockholders

point of view.
(Income per dollar invested)

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Debt
Debt versus
versus Equity
Equity Decision
Decision

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