ACC230-Wk 12-mega-PN 11-SV

ACC230-Wk 12-mega-PN 11-SV - Welcome to ACC230 ! Today's...

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Welcome to ACC230 ! Today’s discussion Capital Structure Stockholders’ Equity Financial Analysis - ratios - Review of business entities Please have out Ppt slides - 4 colored strips Ratio Packet - calculator Blank piece of paper - PN Appendix (Lifetime Fitness
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Capital Structure – debt vs. equity – Considerations Predictions about the economy Performance of your company Potential volatility of your company’s performance Amount of risk you are willing to take Other risk factors HIGHER DEBT = HIGHER RISK
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Debt vs. Equity (+ / - for company) Debt + Reduces need for equity + Interest expense is deductible item for tax purposes (reduces taxes) + Magnification effect of financial leverage - Company has legal obligation to repay the principal amount, even during bad times - Additional debt can negatively impact ratios based on liquidity, net income/profit and leverage/solvency components/totals Positive for Lendor/Creditor Debt must be repaid Negative for lender: Lender/creditor does not share in the success of the company Equity + Reduces need for debt + Company NOT obligated to repay principal AND NO interest expense is incurred + More flexible way to obtain financing (no fixed contracts, etc. for common stock issuance) + Facilitates the trading of stock among broader range of investors + Not obligated to pay dividends - Can lose part of company control due to lower stock ownership - Cannot reduce income before taxes (and taxes themselves) as there is no deduction for dividends - Additional equity can negatively impact ratios based on stockholders’ equity components and totals (ie, increase in # of owners=decrease in EPS) Positive for stockholder: + Potential for gains + dividends Negative for stockholder: Fortunes rise/fall with company
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Expanded Accounting Equation Assets = Liabilities + Owners’ Equity Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings Common Stock Capital in Excess of Par Treasury Stock Capital in Excess of Par
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Financial Statement Articulation Revenues $12,443,000 Expenses 11,578,400 Net income $ 864,600 Income Statement R/E 12/31/07 $ 0 Net income 864,600 Dividends (400,000 ) R/E 12/31/08 $ 464,600 Stmt of Retained Earnings Cash $ 110,000 Other 4,215,000 Total $4,325,000 Liabilities $2,860,400 Com. Stk. 100,000 Excess Cap. 850,000 Pref. Stk. 75,000 R/E 464,600 Treas.Stk. ( 25,000) Total $4,325,000 Balance Sheet 12/31/08 Cash--Op. Act. $ 973,000 Cash--Inv. Act. (1,108,000) Cash--Fin. Act. 245,000 Net increase $ 110,000 Beg. cash 0 End. cash $ 110,000 Cash Flow Statement
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Equity Financing – Stock - Two Main Types Preferred Stock Optional type of stock No Voting Rights Preferred as to dividends Par Value – usually used to calculate dividends Liquidation Preference Can have unique features (see page 525 for discussion): Cumulative
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ACC230-Wk 12-mega-PN 11-SV - Welcome to ACC230 ! Today's...

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