Chapter 14 - Chapter 14 Introduction to Long-Term Financing...

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Chapter 14 Introduction to Long-Term Financing
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Common Stock 1. Number of shares Authorized shares Issued and outstanding shares Issued but not outstanding – treasury shares 2. Accounting for common stock/equity Amount paid when shares are sold = capital surplus + par value Par value is set arbitrarily, often $1 per share As income is earned, retained earnings increase the book value of equity Share repurchases  increase in treasury shares, decrease in book equity Book equity = capital surplus + par value + retained earnings – cost of treasury shares
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3. Market values Market value of equity = shares outstanding x current market price (forward looking) Book value of equity = accounting construct (historical) Market-to-book ratio = market value of equity / book value of equity Tobin’s Q = market value of assets / replacement cost of assets Book Value vs. Market Value? Book value is a backward looking measure. It tells us how much capital the firm has raised from shareholders in the past. It does not measure the value that shareholders place on those shares today. The market value of the firm is forward looking, it depends on the future dividends that shareholders expect to receive.
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Example - Heinz Book Value vs. Market Value (5/2000) Total Shares outstanding = 347 million 1,596 Value) (Book equity common Net 652 - s adjustment Other 2,920 - shares Treasury 4,757 earnings Retained 304 capital in paid Additional 108 Value Par
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Example - Heinz Book Value vs. Market Value (5/00) Total Shares outstanding = 347 million billion $12.1 Value Market 347 x shares of # $35/sh = price Market 2000 May
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4. Voting rights
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Chapter 14 - Chapter 14 Introduction to Long-Term Financing...

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