Financing Activities:
Contributed and Earned Capital
Shareholders’ Equity:
Common Stock
Other Paid-in Capital
Retained Earnings
Stockholders’ Equity
• Growth in Stockholders’ equity
– Owners contribute capital (buy stock)
– Operations are profitable (net income / retained
earnings)
• Reduction in Stockholders’ equity
– Net loss
– Pay dividends
– Buy back shares
• Buy treasury stock
Target Corp. Stockholders Equity at
January 31, 2009 and January 31, 2008
Shareholders’ investment (in US $millions):
Common stock
Additional paid-in-capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ investment
Total liabilities and shareholders’ investment
63
2,762
11,443
(556)
13,712
$44,106
68
2,656
12,761
(178)
15,307
$44,560
Common Stock Authorized 6,000,000,000 shares, $.0833 par value;
752,712,464 shares issued and outstanding at January 31, 2009;
818,737,715 shares issued and outstanding at February 2, 2008
Preferred Stock Authorized 5,000,000 shares, $.01 par value; no shares were
issued or outstanding at January 31, 2009 or February 2, 2008
Stockholders’ Equity Section of the
Balance Sheet
Contributed Capital:
Common stock
Paid-in capital in excess of par
Earned Capital:
Retained earnings
Other:
Other comprehensive income
Contributed Capital: Offering of Shares
• Shares of common stock represent ownership in the entity
• Shareholders make a capital contribution to the company
• The amounts contributed are recorded in contributed
capital accounts
– Common stock (at par)
– Paid in capital in excess of par
• Status of common shares
–
–
–
–
Authorized
Issued
Outstanding
(In treasury)
Issuing Common Stock
Standard Company has 1,000,000 shares of common stock
authorized with a par value of $1 per share, of which 500,000
shares are outstanding. The company received $10 per share
when it issued shares to the public.
Required:
What is the book value of the common stock par account and
the paid-in capital in excess of par (additional paid-in capital)
account?
Solution:
Contributed Capital Illustration
|Cash
5,000,000
| Common stock
| Paid in capital in excess of par
500,000
4,500,000
Contributed Capital:
Common stock, $1 par, 1,000,000 shares authorized,
500,000 shares issued and outstanding
$ 500,000
Paid in capital in excess of par
4,500,000
How Many Shares?
Mann Corporation’s accounting records included the following stockholders’
equity accounts:
Preferred stock, $1 par value, 20,000 shares authorized
Additional paid-in capital – preferred stock
Common stock, $1 par value, 500,000 shares authorized
Paid-in capital in excess of par – common stock
$10,000
$90,000
$100,000
$900,000
Required:
How many shares of preferred stock and how many shares of common
stock have been issued?
Stockholders’ Equity After a Stock
Repurchase
Why do companies buy back shares of the company’s stock?
• Acquire shares to give to employees when they exercise stock options
• Perceive shares to be undervalued
• Company has excess cash to distribute to shareholders
• Alternative to dividends
– Don’t want to be “bound” to an annual dividend payment
• Shareholders that sell their shares taxed at lower marginal capital gains
rate
• Shareholders that do not want to sell shares
– Do not have tax liability “forced” upon them
– Increase their ownership percentage
Excerpt from Express Scripts 12/31/2008 and 12/31/2007 Balance
Sheets
Stockholders’ equity:
Preferred stock, 5,000,000 shares authorized, $0.01 par value per
share; and no shares issued and outstanding
Common stock, 1,000,000,000 shares authorized, $0.01 par value
shares issued: 318,958,000 and 318,886,000, respectively;
shares outstanding: 247,649,000 and 252,371,000, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Common stock in treasury at cost, 71,309,000 and 66,515,000
shares, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
-
-
3.2
3.2
640.8
564.5
6.2
20.9
3,361.0
2,584.9
4,011.2
3,173.5
(2,933.0)
(2,477.1)
1,078.2
696.4
5,509.2
$ 5,256.4
Accounting for Share Repurchases
• Equity reduced by share buyback
– Treasury stock is a contra-shareholders’ equity account
• No gains or losses from transactions in shares of the
company’s own stock
• If treasury shares are reissued for more (less) than
reacquisition cost
– A contributed capital accounting is increased (decreased)
rather than a gain (loss) account
Illustration – Share Repurchases
Parktown Corp. was organized on January 1, 2000. On that date, the company issued
200,000 shares of its $10 par value common stock for $15 per share (400,000
shares were authorized). During the period from January 1, 2000 through
December 31, 2010, Parktown reported net income of $1,000,000 and paid cash
dividends of $200,000. On January 5, 2009, Parktown purchased 10,000 shares of
its common stock (treasury stock) for $12 per share. On December 31, 2010,
Parktown sold 5,000 treasury shares for $8 per share.
Required:
What stockholders’ equity amounts will Parktown report on its December 31, 2012
Balance Sheet?
Stock Dividends and Stock Splits
• Economically the same transaction
– Stock splits involve have no dollar impact on the
accounts
– Stock dividends involve a transfer from retained
earnings to contributed capital
• Capitalize past earnings
•
•
•
•
Increase the number of shares
Reduce the per share par value
Reduce the per share market value
Total stockholders’ equity dollars remain the
same
Stockholders’ Equity After a Stock Split
Effective April 27, 2005, the stockholders of Dorr Corporation
approved a two-for-one split of the company’s common
stock and an increase in authorized common shares from
100,000 shares ($20 par value) to 200,000 shares ($10 par
value). The stock split shares were issued on June 30, 2005.
Dorr’s stockholders’ equity accounts immediately before
issuance of the stock split were:
Common stock, par value $20; 100,000 shares authorized;
50,000 shares outstanding
Additional paid-in capital
Retained earnings
$1,000,000
$150,000
$1,350,000
Dorr’s stock price on the NYSE closed at $100 per share the
night before the split shares were issued.
Stock Split illustration (Continued)
Required:
After issuing the stock split shares
1. What is the number of shares authorized?
2. What is the number of shares outstanding?
3. What is the par value of each share?
4. What is the dollar value of the Common Stock account as shown
on the Balance Sheet (at par)?
5. What is the Additional Paid-in Capital balance?
6. What was the market capitalization of the company before the
stock split?
7. What is the theoretical stock price (and market cap) when shares
opened for trading June 30, 2005 assuming no other value
relevant news?
Earned Capital
• Earned capital (net income) is closed to the
retained earnings account each period
• Retained earnings is the sum of earned and
retained capital to date
– Net income Less Dividends
• Stock dividends also create a transfer from the
earned capital to the contributed capital
accounts
Other Comprehensive Income
• Unrealized gains (losses) that are reflected in net
equity but have not yet been reflected in income
• Gains (losses) coming to a future income statement
• Will ultimately transfer from OCI to retained earnings
• Result from various transactions
– Gains (losses) on available for sale securities
– Gains (losses) on certain derivatives
• Cash flow hedges
– Certain foreign currency translation gains (losses)
– Minimum pension liability adjustments
Earnings Per Share
• Earnings per common share
• Required disclosure on the face of the income
statement
• Highly correlated with stock price
• If you can predict increases (decreases) in
earnings per share
– On average, you can predict the direction of stock
price changes
• Key measure of relative stock price
– P/E ratio
Earnings Per Share (EPS)
and Simple Capital Structure
• Simple capital structure
– No potentially dilutive securities in capital structure
• Securities that can be converted to common stock and dilute
EPS
• Stock options, warrants, rights
• Convertible bonds or convertible preferred stock
• Subscribed stock, contingently issuable shares, other
• Single EPS reported
EPS = [Net income available to common shareholders
/ Weighted average number of common shares outstanding]
EPS and Complex Capital Structure
• Complex capital structure has potentially
dilutive securities
• Dual EPS presented
– Basic and Diluted EPS
• Diluted EPS is EPS adjusted for potentially
issuable shares currently held by third parties
• The “E” in P/E ratio is diluted earnings per
share for companies with a complex capital
structure
Target Corp. EPS
Net earnings
$ 2,214 $ 2,849 $ 2,787
Basic earnings per share
Diluted earnings per share
$ 2.87
$ 2.86
$ 3.37
$ 3.33
$ 3.23
$ 3.21
Weighted average common shares outstanding
Basic
770.4 845.4
Diluted
773.6 850.8
861.9
868.6
Illustration: EPS
The Stream Company’s net income for the year ending
December 31, 2010 was $105,000. During the year, Stream
declared and paid $5,000 cash dividends on preferred
shares and $30,000 cash dividends on common shares. At
December 31, 2010, the company had 100,000 shares of
common stock issued and outstanding – 50,000 had been
issued and outstanding throughout the year and 50,000
were issued on July 1, 2010. There were no other common
stock transactions during the year, and the 5,000 shares of
preferred stock are not convertible into common shares.
Required:
What EPS will Stream Company report for 2010?
Earnings Per Share:
Complex Capital Structure
Information concerning the capital structure of the Peters Corporation is as follows:
December 31
2009
2010
Common stock in shares
100,000
100,000
Preferred stock in shares
10,000
10,000
8% convertible bonds
$1,000,000
$1,000,000
During 2010, Peters paid dividends of $1 per share on its common stock and $2.00 per
share on its preferred stock. The preferred shares are convertible into 20,000
shares of common stock. The 8% convertible bonds are convertible into 40,000
shares of common stock. The net income for the year ending December 31, 2010
was $400,000, and the company’s income tax rate is 40%.
In addition, company employees hold options to purchase 10,000 shares. The
incremental dilution of these options (under the Treasury Stock Method) is 5,000
shares.
Required:
Determine the amounts of Peters Corp.’s dual EPS disclosure for 2010.
Recorded Equity Values versus
Market Equity Values
Target
Express Scripts
1/31/09
12/31/08
(In US $millions)
Book value of equity
$13,712
$1,078.2
Market value of equity
$23,485
$13,616
Market / Book
1.71
12.6