Class Notes - CH 11 - Chapter 11 REPORTING AND INTERPRETING...

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1 11-1 Chapter 11 REPORTING AND INTERPRETING OWNERS’ EQUITY 11-2 Intro to Stockholders’ Equity (SE) The SE section of the balance sheet reflects two of the three sources of capital (the third is debt) Owners’ net contributions (also called " contributed capital ") Profitable operations Total of these two sources is called Stockholder’s Equity, (aka " Net Assets ", " Book Value of the Corporation ", or Net Worth ”)
2 11-3 DuPont Balance Sheet 2014 Stockholders Equity Section of the Balance Sheet 11-4 Debt/Equity Differences When a corporation borrows, they deal with a lender, or debtholder. When a corporation sells stock, they deal with an owner, called a shareholder, or stockholder Some differences between debt and equity Unlike debt, stock does not have a maturity date Payments to debtholders (interest) are tax deductible, payments to owners (dividends) are not Sales of additional equity (stock) dilutes other owners’ interests (i.e. ownership percentage), raising capital through additional debt does not dilute other owners’ interests Typically, a lower debt/equity ratio translates into higher credit ratings (meaning credit remains relatively more available and affordable)
3 11-5 Benefits of Stock Ownership: In General Stockholders are represented by the Board of Directors, who operate on behalf of all shareowners Benefits of stock ownership include: Simple to become an owner (just buy shares) Easy to transfer ownership (just sell shares) Limited liability (your loss is limited to your investment) Voting rights (described below) Dividends (described below) Capital appreciation (described below) Disadvantages of stock ownership include: Additional costs / fees / paperwork Double taxation (can be avoided for most corps) 11-6 Benefits of Stock Ownership: Voting Rights Stockholders get to vote for: the board of directors the auditors, and other major transactions affecting owners’ interests (e.g. mergers, or authorizations to sell more stock) Exception : Preferred stockholders usually do not have voting rights Exception to the exception : Venture capital investments are often make in the form of voting preferred stock. After IPO, however, this is usually converted to common If you are a “small” shareholder, voting rights have little value
4 11-7 Benefits of Stock Ownership: Dividends If declared by the Board of Directors, stockholders’ can receive distributions from the corporation (called dividends) Dividends are a return on contributed capital Dividends represent a distribution of current and past earnings to shareholders Dividends are not considered expenses; thus, dividends do not reduce net income Instead, dividends are reported as a reduction to retained earnings 11-8 Benefits of Stock Ownership: Capital Appreciation If a company performs well, a shareowner sees an appreciation in the value of his/her ownership Conversely, a slump in performance typically leads to a reduction in the ownership value Relative to “lending” money to a company, equity is more volatile (risky)

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