Chapter 11
Stockholders’ Equity
PowerPoint Author:
Brandy Mackintosh, CA
Copyright © 2016 by McGraw-Hill Education
Learning Objective 11-1
Explain the role of stock in
financing a corporation.
11-2
Corporate Ownership
The major advantage of the corporate form of business
is the ease of raising capital as both large and small
investors can participate in corporate ownership.
Simple to
become an
owner
Easy to
transfer
ownership
Provides
limited
liability
Because a corporation is a separate legal entity, it can
 Own assets.
 Incur liabilities.
 Sue and be sued.
 Enter into contracts.
11-3
Corporate Ownership
 Voting rights.
 Dividends.
Stockholder
Benefits
 Residual claims.
 Preemptive rights.
11-4
Equity Versus Debt Financing
Advantages of equity and debt financing.
11-5
Advantages of equity
Advantages of debt
• Equity does not have to
be repaid.
• Interest on debt is tax
deductible.
• Dividends are optional.
• Debt does not change
stockholder control.
Stockholders’ Equity
Contributed
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Stockholders’
Equity
Treasury
Stock
11-6
Retained
Earnings
Learning Objective 11-2
Explain and analyze common
stock transactions.
11-7
Authorization, Issuance, and
Repurchase of Stock
Authorized
Shares
Issued
Shares
11-8
Outstanding shares are
issued shares that are
owned by stockholders.
Issued
Unissued
shares are
shares of
Outstanding
The maximum number
Unissued
authorized
stock are
Shares
of shares
of capital
Shares
shares
of
shares
that
be never
stockstock
that that can
have
Treasury
shares are
haveissued
been to the public.
been
Treasury
issued shares
distributed to
distributed
to that have
Shares
been reacquired by the
stockholders.
stockholders.
corporation.
Authorization, Issuance, and
Repurchase of Stock
11-9
Stock Authorization
Par value is typically a very
nominal amount such a $0.01
per share.
Par value is an
arbitrary amount
assigned to each
share of stock when it
is authorized.
11-10

Market price is the
amount that each
share of stock will sell
for in the market.
Stock Authorization
No-par Stock
Some states
do not
require a par
value to be
stated in the
charter.
11-11
Stock Issuance
Initial public offering
(IPO)
Seasoned new issue
The first time a
corporation issues
stock to the public.
Subsequent issues
of new stock to the
public.
National Beverage
issues stock.
11-12
Stock Issuance
Most issues of stock to the public are cash transactions.
National Beverage issued 100,000 shares of
$0.01 par value common stock for $20 per share.
1
Analyze
Assets
Cash +2,000,000
2
=
Liabilities
+
Stockholders’ Equity
Common Stock
+1,000
Additional Paid-In
Capital
+1,999,000
Record
2,000,000
Cash (100,000 x $20)
1,000
Common Stock (100,000 x $0.01)
1,999,000
Additional Paid-In Capital (2,000,000 – 1,000)
11-13
Stock Exchanged between
Investors
Transactions between two investors do not
affect the corporation’s accounting records.
I’d like to sell 100
shares of National
Beverage stock.
11-14
I’d like to buy 100
shares of National
Beverage stock.
Stock Used to Compensate
Employees
Employees pay
packages can
include stock
options.
Gives the employees the option to acquire
company stock at a later date at a predetermined
price.
If the employees work hard and meet the
corporation’s goals the stock price will increase.
Employees can then exercise their option to
acquire stock at the lower predetermined price
and sell it at the higher price for a profit.
11-15
Repurchase of Stock
A corporation repurchases its stock to:
 Send a signal that the company believes
its stock is worth acquiring.
 Obtain shares to reissue for the purchase
of other companies.
 Obtain shares to reissue to employees as
part of stock option plans.
 Reduce the number of outstanding shares
to increase per-share measures of earnings.
11-16
Repurchase of Stock
National Beverage
repurchases its
own stock
(Treasury stock)
Stockholders
Employee
compensation
package includes
salary plus stock
options.
Stock options allow
employees to purchase
stock at a later date from
the corporation at a
fraction of the stock’s
market price.
Employee
11-17
Repurchase of Stock
No voting
or
dividend
rights
Contra
equity
account
Treasury
stock is not
an asset.
When stock is reacquired, the corporation
records the treasury stock at cost.
11-18
Repurchase of Stock
National Beverage reacquired 50,000 shares
of its common stock at $25 per share.
1
Analyze
Assets
=
Cash -1,250,000
2
+
Stockholders’ Equity
Treasury
Stock (+xSE)
-1,250,000
Record
Treasury Stock (+xSE)
Cash
11-19
Liabilities
1,250,000
1,250,000
Reissuance of Treasury Stock
National Beverage reissued 5,000 shares
of the Treasury Stock at $28 per share.
1
Analyze
Assets
Cash +140,000
2
=
Liabilities
+
Stockholders’ Equity
Treasury Stock (-xSE) +125,000
Additional Paid-In
Capital
+15,000
Record
140,000
Cash (5,000 x $28)
Treasury Stock (-xSE) (5,000 x $25)
Additional Paid-In Capital [5,000 x ($28 - $25)]
125,000
15,000
No profit or loss is recognized on treasury stock transactions.
11-20
Learning Objective 11-3
Explain and analyze cash
dividends, stock dividends,
and stock split transactions.
11-21
Dividends on Common Stock
Declared by board
of directors.
Not legally
required.
Creates liability at
declaration.
Requires sufficient Retained
Earnings and Cash.
11-22
Dividends Dates
1. Declaration Date
2. Date of Record
3. Date of Payment
4. Year End
11-23
Dividends Dates
National Beverage declares a cash dividend of
$118,139,000 during it’s 2013 fiscal year.
1
Analyze
Assets
=
Liabilities
Dividends
Payable +118,139,000
2
Stockholders’ Equity
Dividends
-118,139,000
Record
Dividends
Dividends Payable
11-24
+
118,139,000
118,139,000
Dividends Dates
National Beverage paid the previously declared cash
dividend of $118,139,000.
1
Analyze
Assets
Cash -118,139,000
2
Liabilities
+
Stockholders’ Equity
Dividends
Payable -118,139,000
Record
Dividends Payable
Cash
11-25
=
118,139,000
118,139,000
Dividends Dates
All temporary accounts, including Dividends, are closed
into Retained Earnings at each accounting year-end.
1
Analyze
Assets
=
Liabilities
+
Stockholders’ Equity
Dividends
Retained
Earnings
2
-118,139,000
Record
Retained Earnings
Dividends
11-26
+118,139,000
118,139,000
118,139,000
Stock Dividends
Distribution of additional shares
of stock to stockholders.
No change in total
stockholders’ equity.
No change in
par values.
All stockholders retain same
percentage ownership.
Corporations issue stock dividends to:
 Reduce the market price per share of stock.
 Demonstrate commitment to stockholders while conserving cash
during difficult times.
 Signal that the company expects strong financial performance
in the future.
11-27
Stock Dividends
Small
Large
Stock dividend < 25%
Stock dividend > 25%
Record at current
market value
of stock.
Record at
par value
of stock.
The journal entry moves an amount from
Retained Earnings to other equity accounts.
11-28
Stock Splits
An increase in the number of shares and a corresponding decrease
in par value per share. Retained earnings is not affected.
A stock split creates more
pieces of the same pie.
Assume that a corporation had 1,000,000 shares of $0.01 par
value common stock outstanding before a 2–for–1 stock split.
11-29
Comparison of Distributions
to Stockholders
11-30
Learning Objective 11-4
Describe the characteristics of
preferred stock and analyze
transactions affecting
preferred stock.
11-31
Preferred Stock Issuance
Priority over common stock
Preferred Stock
Usually has a fixed dividend rate
Usually has no voting rights
National Beverage issued 400,000 shares of its
$1 par value preferred stock for $19,704,000.
1
Analyze
Assets
=
Cash +19,704,000
2
+
Stockholders’ Equity
Preferred Stock
+400,000
Additional Paid-In
Capital
+19,304,000
Record
Cash
Preferred Stock
Additional Paid-In Capital
11-32
Liabilities
19,704,000
400,000
19,304,000
Preferred Stock Dividends
• Current Dividend Preference: The current
preferred dividends must be paid before
paying any dividends to common stock.
• Cumulative Dividend Preference: Any
unpaid dividends from previous years
(dividends in arrears) must be paid before
common dividends are paid.
If the preferred stock is noncumulative, any
dividends not declared in previous years are lost
permanently.
11-33
Preferred Stock Dividends
Assume the preferred stock of Flavoria carries
only a current dividend preference and that the
company declares dividends totaling $8,000 in
2015 and $10,000 in 2016. How much would the
preferred and common stockholders receive in
2015 and 2016?
11-34
Preferred Stock Dividends
11-35
Preferred Stock Dividends
Assume that Flavoria Company has the same
amount of stock outstanding. However assume
that dividends are in arrears for 2013 and 2014.
How much would the preferred and common
stockholders receive in 2015 and 2016?
11-36
Preferred Stock Dividends
11-37
Retained Earnings
Total cumulative amount of reported net income less any
net losses and dividends declared since the company
started operating.
Baker Company
Comparative Balance Sheets (Partial)
For Year Ended December 31
Stockholders’ Equity
Common Stock
Additional Paid-in Capital
Retained Earnings (Deficit)
Total Stockholders’ Equity
2015
2014
$ 100,000
750,000
50,000
900,000
$ 100,000
750,000
(70,000)
780,000
Baker Company incurred a loss of $130,000 in 2014 that
resulted in an Accumulated Deficit in Retained Earnings.
11-38
Statement of Stockholders’ Equity
11-39
Learning Objective 11-5
Analyze the earnings per
share (EPS), return on equity
(ROE), and price/earnings
(P/E) ratios.
11-40
Earnings Per Share (EPS)
Earnings per share is probably the single
most widely watched financial ratio.
Net Income – Preferred Dividends
EPS =
Average Number of Common Shares Outstanding
National Beverage’s income for 2013 was $46.92
million, preferred dividends of $0.15 million, and
the average number of shares outstanding during
the year was 46.2 million.
EPS =
11-41
$46.9 – $0.2
46.2 Shares
= $1.01 per share
Return on Equity (ROE)
Return on equity is the amount earned for each
dollar invested by common stockholders.
ROE
=
Net Income – Preferred Dividends
Average Common Stockholders’ Equity
National Beverage’s income for 2013 was
$46.9 million, preferred dividends were $0.2
million, and the average Common
Stockholders’ Equity was $86 million.
ROE
11-42
=
$46.9 - $0.2
$86
=
54.3 percent
Price/Earnings (P/E) Ratio
The P/E ratio is a measure of the value that
investors place on a company’s common stock.
P/E
=
Current Stock Price (per share)
Earnings Per Share (annual)
National Beverage’s stock price was $17.92 when
the company reported its 2013 EPS of $1.01.
P/E
11-43
=
$ 17.92
=
$ 1.01
17.7
Comparison of EPS, ROE,
and P/E Ratios
11-44
Supplement 11A
Owners’ Equity for Other Forms of
Business
Copyright © 2016 by McGraw-Hill Education
Learning Objective 11-S1
Account for owners’ equity in
other forms of business.
11-46
Owner’s Equity for a Sole
Proprietorship
Only two owner’s
equity accounts.
11-47
A Capital account to record
the owner’s investments
and the periodic income
or loss.
A Withdrawal account
to record the owner’s
withdrawals of assets.
No separate retained
earnings account.
Closed to the capital account
at the end of each period.
Accounting for Owner’s Equity
for a Sole Proprietorship
To record a $150,000 investment by H. Simpson, the owner.
To record H. Simpson’s $1,000 monthly withdrawal.
11-48
Accounting for Owner’s Equity
for a Sole Proprietorship
To close revenue and expense accounts to capital.
To close the $1,000 monthly drawings to capital.
11-49
Accounting for Partnership Equity
Accounting for assets, liabilities, revenues, and
expenses follows the same accounting principles as
any other form of business.
Accounting for partners’ equity follows the same
pattern as for a sole proprietorship.
Separate Capital and Drawings accounts are
maintained for each partner.
11-50
Accounting for Partnership Equity
To record investments by partners Able and Baker
who will divide net income as follows: Able, 60
percent and Baker, 40 percent.
To record the partners’ monthly withdrawal.
11-51
Accounting for Partnership Equity
To close revenue and expense accounts to partners’ capital.
To close the monthly drawings to partners’ capital.
11-52
Other Business Forms
Limited
Liability
Partnership
(LLP)
11-53
Limited
Liability
Company
(LLC)
• Protects innocent
partners from
malpractice or
negligence claims.
• Owners have same
limited liability
feature as owners
of a corporation.
• Most states hold all
partners personally
liable for partnership
debts.
• A limited liability
company typically
has a limited life.
Learning Objective 11-S2
Record journal entries for
large and small stock
dividends.
11-54
Large Stock Dividends
National Beverage declared a large stock dividend several
years ago, resulting in the issuance of 7.6 million
common shares with a par value of $0.01 per share.
1
Analyze
Assets
=
Liabilities
+
Stockholders’ Equity
Retained Earnings -76,000
Common Stock +76,000
2
Record
Retained Earnings
Common Stock
11-55
76,000
76,000
Small Stock Dividends
Assume National Beverage issues a small stock dividend
of 10,000 common shares when its stock is trading at $20
per share. A small stock dividend is accounted for at the
market value of the company’s stock.
1
Analyze
Assets
=
Liabilities
+
Stockholders’ Equity
Common Stock
+100
Additional Paid-In
Capital
+199,900
Retained Earnings -200,000
2
Record
Retained Earnings
Common Stock
Additional Paid-In Capital
11-56
200,000
100
199,900
Chapter 11
Solved Exercises
M11-4, M11-7, E11-3, E11-6, E11-8,
E11-11, E11-17
Copyright © 2016 by McGraw-Hill Education
M11-4 Analyzing and Recording the Issuance of Common Stock
To expand operations, Aragon Consulting issued 1,000 shares of previously
unissued common stock with a par value of $1. The price for the stock was
$50 per share. Analyze the accounting equation effects and record the journal
entry for the stock issuance.
1
Analyze
Assets
=
Cash +50,000
2
+
Stockholders’ Equity
Common Stock
+1,000
Additional Paid-In
Capital
+49,000
Record
Cash
Common Stock
Additional Paid-In Capital
11-58
Liabilities
50,000
1,000
49,000
M11-4 Analyzing and Recording the Issuance of Common Stock
Would your answer be different if the par value were $2 per share? If, so,
analyze the accounting equation effects and record the journal entry for the
stock issuance with a par value of $2.
The effects on total assets and total stockholders’ equity would not differ, but
the amounts within the individual stockholders’ equity accounts would differ.
1
Analyze
Assets
=
Cash +50,000
2
+
Stockholders’ Equity
Common Stock +2,000
Additional Paid-In
Capital
+48,000
Record
Cash
Common Stock
Additional Paid-In Capital
11-59
Liabilities
50,000
2,000
48,000
M11-7 Determining the Amount of a Dividend
Netpass Company has 300,000 shares of common stock authorized, 270,000
shares issued, and 100,000 shares of treasury stock. The company’s board of
directors declares a dividend of $1 per share of common stock. What is the
total amount of the dividend that will be paid?
Dividends are paid on shares that are issued and outstanding.
Dividends are not paid on treasury stock.
Shares issued
270,000
Less treasury stock
100,000
Shares outstanding
170,000
Dividend per share
Total dividends paid
11-60
x $
1.00
$170,000
E11-3 Preparing the Stockholders’ Equity Section of the Balance
Sheet
North Wind Aviation received its charter during January. The charter
authorized the following capital stock:
The following transactions occurred during the first year of operations in
the order given:
a. Issued a total of 40,000 shares of the common stock for $15 per share.
b. Issued 10,000 shares of the preferred stock at $16 per share.
c. Issued 3,000 shares of the common stock at $20 per share and 1,000
shares of the preferred stock at $16.
d. Net income for the first year was $48,000.
Required:
Prepare the stockholders’ equity section of the balance sheet at December
31.
11-61
E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet
North Wind Aviation
Stockholders’ Equity
December
December
31,31
2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
11,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, $1 par, 50,000 shares authorized,
43,000 shares issued and outstanding
$$ 110,000
11,000
66,000
43,000
10,000 shares
($16 –Common
$10) + 1,000 shares × ($16 – $10)617,000
Additional
Paid-in×Capital,
Total Contributed Capital
836,000
Retained
40,000Earnings
shares × ($15 – $1) + 3,000 shares × ($20 – $1) 48,000
$ 884,000
Total Stockholders’ Equity
11-62
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Ava School of Learning obtained a charter at the start of the year that
authorized 50,000 shares of no-par common stock and 20,000 shares of
preferred stock, par value $10. During the year, the following selected
transactions occurred:
a. Collected $40 cash per share from four individuals and issued 5,000
shares of common stock to each.
b. Issued 6,000 shares of common stock to an outside investor at $40 cash
per share.
c. Issued 8,000 shares of preferred stock at $20 cash per share.
Required:
1. Give the journal entries indicated for each of these transactions.
2. Prepare the stockholders’ equity section of the balance sheet at
December 31. At the end of the year, the accounts reflected net
income of $36,000. No dividends were declared.
11-63
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Required:
1. Give the journal entries indicated for each of these transactions.
(a) Collected $40 cash per share from four individuals and issued 5,000
shares of common stock to each.
Cash (5,000 x $40 x 4)
Common Stock
800,000
800,000
(b) Issued 6,000 shares of common stock to an outside investor at $40
cash per share.
Cash (6,000 x $40)
Common Stock
11-64
240,000
240,000
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Required:
1. Give the journal entries indicated for each of these transactions.
(c) Issued 8,000 shares of preferred stock at $20 cash per share.
Cash (8,000 x $20)
Preferred Stock
Additional Paid-in Capital
11-65
160,000
80,000
80,000
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Required:
2. Prepare the stockholders’ equity section of the balance sheet at
December 31, 2013. At the end of 2013, the accounts reflected net
income of $36,000. No dividends were declared.
Ava School of Learning
Stockholders’ Equity
December
31,31
2013
December
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
$ 80,000
Common
CommonStock,
Stock,no
nopar,
par,50,000
50,000shares
sharesauthorized,
authorized,
26,000 shares issued and outstanding
Additional
AdditionalPaid-in
Paid-inCapital,
Capital Preferred
1,040,000
80,000
1,200,000
Total Contributed Capital
(20,000 shares × $40) + (6,000 shares × ($40)
36,000
Retained Earnings
8,000 shares x ($20 - $10)
$1,236,000
Total Stockholders’ Equity
11-66
E11-8 Recording Treasury Stock Transactions and Analyzing Their
Impact
The following selected transactions occurred for Corner Corporation:
Feb. 1 Purchased 400 shares of the company’s own common stock at $20
cash per share; the stock is now held in treasury.
Jul. 15 Issued 100 of the shares purchased on February 1, for $30
cash per share.
Sept. 1 Issued 60 more of the shares purchased on February 1, for
$15 cash per share.
Required:
1. Show the effects of each transaction on the accounting equation.
2. Give the indicated journal entries for each of the transactions.
3. What impact does the purchase of treasury stock have on dividends
paid?
4. What impact does the issuance of treasury stock for an amount higher
than the purchase price have on net income?
11-67
E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact
Required:
1. Show the effects of each transaction on the accounting equation.
1
Analyze
Date
Assets
=
Liabilities
+
Stockholders’ Equity
Feb. 1
Cash
- 8,000
Treasury Stock (+xSE)
- 8,000
Jul. 15
Cash
+ 3,000
Treasury Stock (-xSE)
Additional Paid-in
Capital – treasury
+ 2,000
Sept. 1
11-68
Cash
+ 900
Treasury Stock (-xSE)
Additional Paid-in
Capital
++1,000
1,000
+ 1,200
- 300
E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact
Required:
2. Give the indicated journal entries for each of the transactions.
2
Record Feb. 1
Treasury Stock (+xSE)
Cash (400 x $20)
2
3,000
2,000
1,000
Record Sept. 1
Cash (60 x $15)
Additional Paid-in Capital
Treasury Stock (-xSE) (60 x $20)
11-69
8,000
Record July 15
Cash (100 x $30)
Treasury Stock (-xSE)
Additional Paid-In Capital
2
8,000
900
300
1,200
E11-8 Recording Treasury Stock Transactions and Analyzing Their
Impact
Required:
3. What impact does the purchase of treasury stock have on dividends paid?
Dividends are not paid on treasury stock. Therefore, the total amount
of cash dividends paid is reduced when treasury stock is purchased.
4. What impact does the issuance of treasury stock for an amount higher
than the purchase price have on net income?
The sale of treasury stock for more or less than its original purchase price
does not have an impact on net income. The transaction affects only balance
sheet accounts.
11-70
E11-11 Recording the Payment of Dividends and Preparing a Statement
of Retained Earnings
The annual report for Sneer Corporation disclosed that the company
declared and paid preferred dividends in the amount of $100,000 in the
current year. It also declared and paid dividends on common stock in the
amount of $2 per share. During the year, Sneer had 1,000,000 common
shares authorized; 300,000 shares had been issued; 100,000 shares were in
treasury stock. The opening balance in Retained Earnings was $800,000
and Net Income for the current year was $300,000.
Required:
1. Prepare journal entries to record the declaration, and payment, of
dividends on (a) preferred and (b) common stock.
2. Using the information given above, prepare a Statement of Retained
Earnings for the year ended December 31.
3. Prepare a journal entry to close the Dividends account.
11-71
E11-11 Recording the Payment of Dividends and Preparing a Statement of
Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of
dividends on (a) preferred and (b) common stock.
a. Preferred Stock
Declaration
Dividends
Dividends Payable
100,000
100,000
Payment
Dividends Payable
Cash
11-72
100,000
100,000
E11-11 Recording the Payment of Dividends and Preparing a Statement of
Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of
dividends on (a) preferred and (b) common stock.
b. Common Stock
Dividends are paid on shares that are issued and outstanding.
Dividends are not paid on treasury stock.
Shares issued
Less treasury stock
Shares outstanding
Dividend per share
Total dividends paid
11-73
300,000
100,000
200,000
x $
2.00
$400,000
E11-11 Recording the Payment of Dividends and Preparing a Statement of
Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of
dividends on (a) preferred and (b) common stock.
b. Common Stock
Declaration
Dividends
Dividends Payable
400,000
400,000
Payment
Dividends Payable
Cash
11-74
400,000
400,000
E11-11 Recording the Payment of Dividends and Preparing a Statement of
Retained Earnings
2. Using the information given above, prepare a Statement of Retained
Earnings for the year ended December 31.
Sneer Corporation
Statement of Retained Earnings
For Year Ended December 31
Retained Earnings, January 1
Plus:
Net Income
300,000
Less: Dividends on Preferred Stock
(100,000)
Dividends on Common Stock
(400,000)
Retained Earnings, December 31
11-75
$ 800,000
$ 600,000
E11-11 Recording the Payment of Dividends and Preparing a Statement of
Retained Earnings
3. Prepare a journal entry to close the Dividends account.
Close Dividends Account
Retained Earnings
Dividends
11-76
500,000
500,000
E11-17 Determining the Effect of a Stock Repurchase on EPS and ROE
Swimtech Pools Inc. (SPI) reported the following in its financial statements
for the quarter ended March 31, 2015.
During the quarter ended March 31, SPI reported Net Income of $5,000 and
declared and paid cash dividends totaling $5,000.
Required:
1. Calculate earnings per share (EPS) and return on equity (ROE) for the
quarter ended March 31.
Net Income
EPS =
Average Number of Common Shares Outstanding
EPS =
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$5,000
50,000 Shares
= $0.10 per share
E11-17 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
1. Calculate earnings per share (EPS) and return on equity (ROE) for the
quarter ended March 31.
ROE
ROE
11-78
=
Net Income
Average Stockholders’ Equity
=
$5,000
$100,000
=
5.0 percent
E11-17 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
2. Assume SPI repurchases 10,000 shares of its common stock at a price of $2
per share on April 1, 2015. Also assume that during the quarter ended
June 30, 2015, SPI reported Net Income of $5,000, and declared and
paid cash dividends totaling $5,000. Calculate earnings per share
(EPS) and return on equity (ROE) for the quarter ended June 30, 2015.
EPS =
$5,000
40,000 Shares
= $0.125 per share
If 10,000 shares are repurchased on April 1, 2015, only 40,000
shares would be outstanding from April 1 – June 30, 2015.
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E11-17 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
2. Assume SPI repurchases 10,000 shares of its common stock at a price of $2
per share on April 1, 2015. Also assume that during the quarter ended
June 30, 2015, SPI reported Net Income of $5,000, and declared and
paid cash dividends totaling $5,000. Calculate earnings per share
(EPS) and return on equity (ROE) for the quarter ended June 30, 2015.
ROE
$5,000
=
=
($100,000 +80,000)/2
5.6 percent
10,000 shares are repurchased for $20,000 on April 1, 2015,
resulting in a Stockholders’ Equity balance of $80,000 from
April 1 – June 30, 2015.
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E11-17 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
3. Based on your calculations in requirements 1 and 2, what can you
conclude about the impact of a stock repurchase on EPS and ROE?
By repurchasing stock, a company can
increase both its EPS and ROE.
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End of Chapter 11
11-82