Lecture18 - Lecture 18 Shareholders Equity Goals of Today's...

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Lecture 18 Shareholders Equity
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2 Goals of Today’s Class • Accounting for: – Treasury stock (stock repurchase) – Stock splits – Stock dividends – Options and warrants • Closer look at Equity-based compensation
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3 Shareholder’s Equity Shareholders' Equity is a term used to describe amounts invested by the owners (equity investors) of the enterprise. In addition, the shareholders' equity represents the owners claims against the assets of the firm (relative to those of the creditors). In general, the shareholders' equity is described in terms of two basic components (although there may be, and often are, others): Contributed Capital - amounts invested "directly" by the owners through the acquisition of capital stock. Retained Earnings - past earnings (net assets) reinvested in the firm (rather than withdrawn in the form of dividends). - retained earnings are often described as a "temporary investment" since that amount can be withdrawn by the owners at any time in the form of dividends.
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4 Common Stock Common Stock represents the basic ownership interest. Typically, only common stock conveys voting rights to its holders. And it is through the exercise of those voting rights that common shareholders exercise their right to participate in the management of the firm. Common shareholders bear the majority of the risk of the firm. Their claim to the assets of the business is a residual one which is only exercisable after other claims have been satisfied. Similarly, their claim to the earnings of the enterprise, in the form of dividends, may only be exercised after the claims of the firm’s creditor – for interest – and of the preferred shareholders have been satisfied. Typically, common shares are assigned a “par value” or a “stated value”. Par/stated value has a legal significance but is not a measure of economic value.
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Preferred Stock Preferred Stock also represents an ownership interest in the firm. However, some of the rights associated with preferred shares supercede (or, are preferred to) those of common stock. Most typically, the right to receive dividends (when dividends are declared) associated with preferred shares precedes that of common shares. Such preferred stock is said to be “preferred with respect to dividends”. When dividends are declared, the preferred shareholders must be paid the full amount of their dividends before any dividend amount may be paid to common shareholders. Generally, the amount of dividends to be paid to each preferred share is specified in the preferred share contract. Generally, the dividend preference associated with a preferred share is “cumulative”. If a dividend is not declared for a year, the preferred shareholders’ will not receive any dividends for that year. However, their right to receive the dividend for that year carries forward and must be satisfied in some later period, when dividends are declared, before any dividend can be paid to common shares. When preferred dividends are
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Lecture18 - Lecture 18 Shareholders Equity Goals of Today's...

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