Stockholders Equity PowerPoint Authors Brandy Mackintosh Lindsay Heiser Learning Objective 111 Explain the role of stock in financing a corporation Corporate Ownership The major advantage of the corporate form of business is the ease of raising capital as both large and small inv ID: 380467
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Slide1
Chapter 11
Stockholders’ Equity
PowerPoint Authors:
Brandy Mackintosh
Lindsay
HeiserSlide2
Learning Objective 11-1
Explain the role of stock in financing a corporationSlide3
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.Slide4
Voting rights.
Dividends.
Residual claims.
Stockholder
Benefits
Corporate Ownership
Preemptive rights.Slide5
Corporate OwnershipSlide6
Equity Versus Debt Financing
Advantages of equity
Equity does not have to be repaid.
Dividends are optional.
Advantages of debt
Interest on debt is tax deductible.
Debt does not change stockholder control.
Advantages of equity and debt financing.Slide7
Learning Objective 11-2
Explain and analyze common stock transactions.Slide8
Common Stock TransactionsSlide9
Authorization, Issuance, and Repurchase of Stock
The maximum number of shares of capital stock that can be issued to the public.
Issued shares are authorized shares of stock that have been distributed to stockholders.
Unissued shares of stock are shares that have never been distributed to stockholders.
Unissued
Shares
Treasury
Shares
Outstanding
Shares
Issued
Shares
Treasury shares
are issued shares that have been reacquired by the corporation.
Outstanding shares
are issued shares that are owned by stockholders.
Authorized
SharesSlide10
Authorization, Issuance, and Repurchase of StockSlide11
Par value is typically a very nominal amount such a $0.01 per share.
Stock Authorization
Par value
is an arbitrary amount assigned to each share of stock when it is authorized.
Market price
is the amount that each share of stock will sell for in the market.
Slide12
Some states do not
require a par value to be stated in the charter.
No-par Stock
Stock AuthorizationSlide13
Stock Issuance
Initial public offering (IPO)
The first time a corporation issues stock to the public.
Seasoned new issue
Subsequent issues of new stock to the public.
National Beverage
issues stock.Slide14
Most issues of stock to the public are cash transactions.
Stock Issuance
National Beverage issued 100,000 shares of
$0.01 par value common stock for $10 per share.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +1,000,000
Common Stock +1,000
Additional Paid-In
Capital +999,000
2
Record
dr Cash (+A) (100,000 x $10)
cr Common Stock (+SE) (100,000 x $0.01)
cr Additional Paid-In Capital (+SE)
(1,000,000 – 1,000)
1,000
999,000
1,000,000Slide15
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.
I’d like to buy 100 shares of National Beverage stock.Slide16
Stock Used to Compensate Employees
Employees pay packages can include stock options
Gives the employees the option to acquire company stock 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.Slide17
Repurchase of Stock
A corporation repurchases its stock to:
Distribute excess cash to stockholders.
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.Slide18
Repurchase of Stock
National Beverage repurchases its own stock
(Treasury stock)
Stockholders
Stock options
allow employees to purchase stock from the corporation at a fraction of the stock’s market price.
Employee
Employee compensation package includes salary plus
stock options
.Slide19
No voting or dividend rights
Contra equity account
When stock is reacquired, the corporation records the treasury stock at
cost
.
Treasury
stock is not
an asset.
Repurchase of StockSlide20
National Beverage reacquired 50,000 shares
of its common stock at $25 per share.
Repurchase of Stock
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash -1,250,000
Treasury
Stock (+xSE) -1,250,000
2
Record
dr Treasury Stock (+xSE, -SE)
cr Cash (-A)
1,250,000
1,250,000Slide21
Reissuance of Treasury Stock
National Beverage reissued 5,000 shares
of the Treasury Stock at $28 per share.
No profit or loss is recognized on treasury stock transactions.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +140,000
Treasury Stock (-xSE) +125,000
Additional Paid-In
Capital +15,000
2
Record
dr Cash (+A) (5,000 x $28)
cr Treasury Stock (-xSE, +SE) (5,000 x $25)
cr Additional Paid-In Capital (+SE)
[5,000 x ($28 - $25)]
125,000
15,000
140,000Slide22
Learning Objective 11-3
Explain and analyze cash dividends, stock dividends, and stock split transactions.Slide23
Dividends on Common Stock
Declared by board of directors.
Not legally
required.
Creates liability at declaration.
Requires sufficient Retained Earnings and Cash.Slide24
Dividends DatesSlide25
Dividends Dates
National Beverage declares an $2.30 dividend on each share
of its 46,200,000 shares of common stock outstanding.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Dividends
Payable +106,260,000
Dividends
Declared (+D) -106,260,000
2
Record
dr Dividends Declared (+D, -SE)
cr Dividends Payable (+L)
106,260,000
106,260,000Slide26
Dividends Dates
National Beverage paid the previously declared $2.30
dividend on its shares of common stock outstanding.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash -106,260,000
Dividends
Payable -106,260,000
2
Record
dr Dividends Payable (-L)
cr Cash (-A)
106,260,000
106,260,000Slide27
No change in total stockholders’ equity.
No change in
par values.
All stockholders retain same percentage ownership.
Stock Dividends
Corporations issue stock dividends to:
Remind stockholders of the accumulating wealth in the company.
Reduce the market price per share of stock.
Signal that the company expects strong financial performance
in the future.
Distribution of additional shares
of stock to stockholders.Slide28
Record at current
market value
of stock.
Record at
par value
of stock.
Small
Large
The journal entry moves an amount from
Retained Earnings to other equity accounts.
Stock Dividends
Stock dividend
>
20 – 25%
Stock dividend
<
20 – 25%Slide29
National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock dividend.
Stock Dividends
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Retained Earnings -76,000
Common Stock +76,000
2
Record
dr Retained Earnings (-SE)
cr Common Stock (+SE)
76,000
76,000Slide30
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.Slide31
Comparison of Distributions
to StockholdersSlide32
Learning Objective 11-4
Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.Slide33
Preferred Stock Issuance
National Beverage issued 10,000 shares of its
$1 par value preferred stock for $5 per share.
Usually has no voting rights
Usually has a fixed dividend rate
Preferred Stock
Priority over common stock
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +50,000
Preferred Stock +10,000
Additional Paid-In
Capital Preferred +40,000
2
Record
dr Cash (+A) (10,000 x $5)
cr Preferred Stock (+SE) (10,000 x $1)
cr Additional Paid-In Capital – Preferred (+SE)
10,000
40,000
50,000Slide34
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. Slide35
Assume the preferred stock of
Flavoria
carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in 2013. How much would the preferred and common stockholders receive in 2012 and 2013?
Preferred Stock Dividends Slide36
Preferred Stock Dividends Slide37
Assume that
Flavoria
Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and 2011. How much would the preferred and common stockholders receive in 2012 and 2013?
Preferred Stock Dividends Slide38
Preferred Stock Dividends Slide39
Retained Earnings
Total cumulative amount of reported net income less any net losses and dividends declared since the company started operating.
Baker Company incurred a loss of $120,000 in 2013 that
resulted in an Accumulated Deficit in Retained Earnings.
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
2014
$ 100,000
750,000
50,000900,0002013
$ 100,000750,000(70,000) 780,000Slide40
Learning Objective 11-5
Analyze the earnings per share (EPS), return on equity (ROE), and price/earnings (P/E) ratios.Slide41
Net Income
Average Number of Common Shares Outstanding
EPS =
National Beverage’s income for 2011 was $40,800,000 and the average number of shares outstanding during the year was 46,200,000.
Earnings per share is probably the single most widely watched financial ratio.
Earnings Per Share (EPS)
$40,800,000
46,200,000 Shares
EPS =
= $0.88 per shareSlide42
Return on Equity (ROE)
Net Income
Average Stockholders’ Equity
ROE =
National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’ Equity was $110,950,000.
Return on equity is the amount earned for each dollar invested by stockholders.
$40,800,000
$110,950,000
ROE =
= 36.8 percentSlide43
Price/Earnings (P/E) Ratio
Current Stock Price (per share)
Earnings Per Share (annual)
P/E =
The P/E ratio is a measure of the value that investors place on a company’s common stock.
National Beverage’s stock price was
$15.10 when
the company reported its 2011 EPS of $0.88.
$ 15.10
$ 0.88
P/E =
= 17.2Slide44
Comparison of EPS, ROE,
and P/E RatiosSlide45
Supplement 11A
Owners’ Equity for Other Forms of BusinessSlide46
Owner’s Equity for a Sole Proprietorship
Only two owner’s
equity accounts.
A Withdrawal account
to record the owner’s
withdrawals of assets.
A Capital account to record
the owner’s investments
and the periodic income
or loss.
Closed to the capital account
at the end of each period.
No separate retained
earnings account.Slide47
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.Slide48
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.Slide49
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.
Accounting for Partnership EquitySlide50
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.Slide51
Accounting for Partnership Equity
To close revenue and expense accounts to partners’ capital.
To close the monthly drawings to partners’ capital.Slide52
Other Business Forms
Limited Liability Partnership
(LLP)
Protects innocent
partners from
malpractice or
negligence claims.
Most states hold all
partners personally
liable for partnership
debts.
Limited Liability Company
(LLC)
Owners have same
limited liability
feature as owners
of a corporation.
A limited liability
company typically
has a limited life.Slide53
Chapter 11
Solved Exercises
M11-4, M11-8, E11-3, E11-6, E11-8, E11-11, E11-19Slide54
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
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +50,000
Common Stock +1,000
Additional Paid-In
Capital +49,000
2
Record
dr Cash (+A)
cr Common Stock (+SE)
cr Additional Paid-In Capital (+SE)
1,000
49,000
50,000Slide55
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
Liabilities
Assets
=
Stockholders’ Equity
+
Cash +50,000
Common Stock +2,000
Additional Paid-In
Capital +48,000
2
Record
dr Cash (+A)
cr Common Stock (+SE)
cr Additional Paid-In Capital (+SE)
2,000
48,000
50,000Slide56
M11-8
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
Less treasury stock
Shares outstanding
Dividend per share
Total dividends paid
270,000
100,000170,000x $ 1.00
$170,000Slide57
E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet
North Wind Aviation received its charter during January 2013. The charter authorized the following capital stock:
During 2013, the following transactions occurred 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, 2013.Slide58
E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
$ 430,000
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
$ 430,000
66,000
10,000 shares × ($16 – $10) + 1,000 shares × ($16 – $10)
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, $1 par, 50,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Common
$ 430,000
66,000
43,000
617,000
40,000 shares × ($15 – $1) + 3,000 shares × ($20 – $1)
North Wind Aviation
Stockholders’ Equity
December 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
Additional Paid-in Capital, Common
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 110,000
66,000
43,000
617,000
836,000
48,000
$ 884,000Slide59
E11-6
Recording and Reporting Stockholders’ Equity Transactions
AvA
School of Learning obtained a charter at the start of 2013 that authorized 50,000 shares of no-par common stock and 20,000 shares of preferred stock, par value $10. During 2013, 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, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.Slide60
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.
(b)
Issued 6,000 shares of common stock to an outside investor at $40
cash per share.
dr Cash (+A) (5,000 x $40 x 4)
cr Common Stock (+SE)
800,000
800,000
dr Cash (+A) (6,000 x $40)
cr Common Stock (+SE)
240,000
240,000Slide61
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.
dr Cash (+A) (8,000 x $20)
cr Preferred Stock (+SE)
cr Additional Paid-in Capital, Preferred (+SE)
80,000
80,000
160,000Slide62
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, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized, 8,000 shares issued and outstanding
$ 80,000
AvA
School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized, 8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
$ 80,000
80,000
8,000 shares x ($20 - $10)
AvA
School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, no par, 50,000 shares authorized,
26,000 shares issued and outstanding
$ 80,000
80,000
1,040,000
(20,000 shares × $40) + (6,000 shares × ($40)
AvA
School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, no par, 50,000 shares authorized,
26,000 shares issued and outstanding
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 80,000
80,000
1,040,000
1,200,000
36,000
$1,236,000Slide63
E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact
During 2013, the following selected transactions affecting stockholders’ equity occurred for Corner Corporation:
Feb. 1 Purchased 400 shares of the company’s own common stock at $20
cash per share.
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?Slide64
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
=
Stockholders’ Equity
+
Cash - 8,000
Treasury Stock (+xSE) - 8,000
Liabilities
Feb. 1
1
Analyze
Date
Assets
=
Stockholders’ Equity
+
Cash - 8,000
Cash + 3,000
Treasury Stock (+xSE) - 8,000
Treasury Stock (-xSE) + 2,000
Additional Paid-in
Capital – treasury + 1,000
Liabilities
Feb. 1
Jul. 15
1
Analyze
Date
Assets
=
Stockholders’ Equity
+
Cash - 8,000
Cash + 3,000
Cash + 900
Treasury Stock (+xSE) - 8,000
Treasury Stock (-xSE) + 2,000
Additional Paid-in
Capital – treasury + 1,000
Treasury Stock (-xSE) + 1,200
Additional Paid-in
Capital – treasury - 300
Liabilities
Feb. 1
Jul. 15
Sept. 1Slide65
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
dr Treasury Stock (+xSE)
cr Cash (-A) (400 x $20)
8,000
8,000
2
Record July 15
dr Cash (+A) (100 x $30)
cr Treasury Stock (-xSE, +SE)
cr Additional Paid-In Capital – Treasury (+SE)
2,000
1,000
3,000
2
Record Sept. 1
dr Cash (+A) (60 x $15)
dr Additional Paid-in Capital - Treasury (-SE)
cr Treasury Stock (-xSE, +SE) (60 x $20)
1,200
900
300Slide66
E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact
Required:
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?
Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased.
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. Slide67
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings
The 2012 annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $100,000 in 2012. It also declared and paid dividends on common stock in the amount of $2 per share. During 2012, Sneer had 1,000,000 common shares authorized; 300,000 shares had been issued; 100,000 shares were in treasury stock. The balance in Retained Earnings was $800,000 on December 31, 2011, and 2012 Net Income 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, 2013.Slide68
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
dr Dividends Declared (-SE)
cr Dividends Payable (+L)
100,000
100,000
Payment
dr Dividends Payable (-L)
cr Cash (-A)
100,000
100,000Slide69
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
300,000
100,000
200,000
x
$ 2.00$400,000Slide70
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
dr Dividends Declared (-SE)
cr Dividends Payable (+L)
400,000
400,000
Payment
dr Dividends Payable (-L)
cr Cash (-A)
400,000
400,000Slide71
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, 2013.
Sneer Corporation
Statement of Retained Earnings
For Year Ended December 31, 2013
Retained Earnings, January 1, 2013
Plus: Net Income
Less: Dividends declared on Preferred Stock
Dividends declared on Common Stock
Retained Earnings, December 31, 2013
$ 800,000
300,000
(100,000)
(400,000)$ 600,000Slide72
E11-19
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, 2013.
During the quarter ended March 31, 2013, 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, 2013.
Net Income
Average Number of Common Shares Outstanding
EPS =
$5,000
50,000 Shares
EPS =
= $0.10 per shareSlide73
E11-19
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, 2013.
Net Income
Average Stockholders’ Equity
ROE =
$5,000
$100,000
ROE =
= 5.0 percentSlide74
E11-19
Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
2. Assume SPI repurchases 10,000 of its common stock at a price of $2
per share on April 1, 2013. Also assume that during the quarter ended
June 30, 2013, 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, 2013.
$5,000
40,000 Shares
EPS =
= $0.125 per share
If 10,000 shares are repurchased on April 1, 2013, only 40,000
shares would be outstanding from April 1 – June 30, 2013.Slide75
$5,000
$80,000
ROE =
= 6.25 percent
10,000 shares are repurchased for $20,000 on April 1, 2013, resulting in a Stockholders’ Equity balance of $80,000 from
April 1 – June 30, 2013.
E11-19
Determining the Effect of a Stock Repurchase on EPS and ROE
Required:
2. Assume SPI repurchases 10,000 of its common stock at a price of $2
per share on April 1, 2013. Also assume that during the quarter ended
June 30, 2013, 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, 2013.
Slide76
E11-19
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, 2013.
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.Slide77
End of Chapter 11