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201Lec11 - 201Lec11.PPT CORPORATIONS Separate Legal Entity...

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Unformatted text preview: 201Lec11.PPT CORPORATIONS Separate Legal Entity created by law - Enter into contracts - Declare bankruptcy - Pay tax on income - Continuous life Not hard to form - File for state charter - Articles, By-laws, Initial stockholders - Authorization to issue stock 1 The Corporate Form of Organization The Corporate Form of Organization Corporation - Legal Entity Owned by Stockholders/shareholders (publicly or privately/closely held) Shares owned / Total Shares = % owned by each stockholder Elect Representatives Board of Directors (BOD) Control & Guide Business Appoint Managers Officers CEO/ CFO / President / Vice President / Etc Run day to day operations of business and carry out BOD directions. 2 Why Incorporate? Why Incorporate? Protect shareholders personal assets - Only investment in stock is at risk - Enter risky businesses Raise money Tax planning Ease of changing / ownership transferring 3 Why NOT Incorporate? Why NOT Incorporate? Regulations, paperwork Tax traps (Double TAX) Corp earns $, pays tax. Pay out to shareholders, then they pay tax again. U Make It - We Take It IRS 4 Alternatives to regular corporate form: Alternatives to regular corporate form: S corporation: - 100 shareholder maximum - Regular corporation first, then shareholders elect subchapter S status with the IRS. - NO TAX paid by corporation. - Shareholders must each claim their share of corporate income on their tax returns. - Called a "flow through" entity. 5 Alternatives to regular corporate form: Alternatives to regular corporate form: Limited Liability Company or Partnership (LLC, LLP) - Relatively new type of entity - Set up process is similar to corporations - Also flow through entities - No maximum number of "members" Also from chapter 1: Sole Proprietorship, General Partnership 6 Stock of a corporation: Stock of a corporation: Stock must be authorized by state for sale. Issued stock was given or traded to shareholders. Outstanding means someone owns it. Stock bought back from stockholders is treasury stock. sold, 7 COMMON Stock: COMMON Stock: Generally, all corporations have some common stock. Typically each share has 1 vote for BOD. Can have Par Value, Stated Value or No Par. - Has little meaning for common stock. See preferred stock discussion though. - Has nothing to do with market value. 8 EXAMPLE: Issue 500,000 shares for $55/share. PAR VALUE (or stated value) is $1/share. Cash 27,500,000 Common Stock 500,000 Paid-In-Capital in Excess of Par (plug) 27,000,000 Note: If NO Par, NO Stated Value: No paid in capital in excess of par is used. Credit all to common stock. 9 BALANCE SHEET Stockholder's Equity Paid in capital: Common Stock Paid-In-Capital in Excess of Par Total paid in capital $ 500,000 27,000,000 $27,500,000 10 PREFERRED Stock: PREFERRED Stock: Optional class of stock. Usually LARGE Par, FIXED dividend rate. For preferred, par does affect: - dividend amount - liquidation amount - market price Preferential treatment over common stock: ~ Receive Liquidation assets before common stock. ~ Dividends received before common stock If Cumulative, current unpaid dividends accumulate to be paid in the future. (called "dividends in arrears") 11 EXAMPLE: 100,000 shares of $100 par 5% cumulative P/S. 500,000 shares of $1 par C/S. Pay $1,200,000 dividends in 2012, no payouts in 2011. P/S Dividends = ($500,000 for 2012) + ($500,000 in Arrears) = $1,000,000. C/S Dividends = Left overs = $1,200,000 - $1,000,000 = $200,000. Note dividends in arrears are not liabilities! 12 STOCK VALUES: Price per Share Time Preferred price hovers around par. Common price bounces around, no relation to par. 13 TREASURY Stock: TREASURY Stock: Stock issued, then reaquired by corp. - Buy out unhappy or retiring shareholders - Use excess cash to reduce equity owners. Fewer shareholders to deal with, maximize EPS. - Increase or decrease take-overs. Mergers, acquisitions, buy-outs Not an asset. Contra-Equity. 14 EXAMPLE: Assume 1,000 shares in previous example were reacquired several years later for $70 per share. Treasury Stock 70,000 Cash 70,000 BALANCE SHEET Stockholder's Equity Paid in capital: Common Stock Paid-In-Capital in Excess of Par Total paid in capital Retained Earnings Less: Treasury Stock Total Stockholder's Equity $ 500,000 27,000,000 $ 27,500,000 xxx,xxx,xxx ( 70,000) $xxx,xxx,xxx 15 DIVIDENDS -- General information DIVIDENDS General information Distributions to shareholders - Cash - Additional stock - Other assets (excess inventory, personal use of corporate assets) Must be declared (announced) by BOD. - Becomes a liability on declaration Taxable income to shareholders, not deductible by corporations. - Except stock dividends aren't taxable 16 DIVIDENDS -- Relevant dates DIVIDENDS Relevant dates Dec 1: Retained earnings (or dividends) Dividends payable xxxx xxxx Dec 22: No entry. Stock price decreases. (trades "ex-dividend") Jan 20: Dividends payable Cash xxxx xxxx 17 STOCK DIVIDENDS STOCK DIVIDENDS Shareholders get more stock. - No assets are used Say a company worth $1,200,000 has 100,000 shares of stock outstanding. Price per share = $1,200,000 / 100,000 = $12.00. Pay a 20% stock dividend. Total shares now = 100,000 + 20,000 = 120,000. Price per share will be $1,200,000 / 120,000 = $10.00 Same pie, more slices 18 Why bother with stock dividends? Answer: Lower stock price to increase marketability Say a company worth $1 million has 100,000 shares. After many successful years it is now worth $1 billion. Original: $10/share Now: $10,000/share 19 Example: Konk Co. has 80,000 shares of stock. Par value is $1 per share and current market price is $100 per share. Konk pays a 20,000 share stock dividend. Declaration date: Retained earnings 2,000,000 Common stock dividends distributable 20,000 Paid-incapital in excess of par 1,980,000 Record date: No entry. Stock price decreases to $80 per share. Payment date: Common stock dividends distributable Common stock 20,000 20,000 20 STOCK SPLITS STOCK SPLITS Very similar to stock dividend No journal entries. Merely spread out par value over new number of shares. EXAMPLE: 100,000 shares of $1 par are split 2 for 1. Result = 200,000 shares of $0.50 par. 21 Ratios: The PAYOUT ratio Ratios: The PAYOUT ratio CASH DIVIDENDS DECLARED ON COMMON STOCK NET INCOME ... measures the percentage of earnings distributed in the form of cash dividends to common stockholders. 22 Ratios: Return on Common Stockholders' Equity Ratios: Return on Common Stockholders' Equity Net Income Preferred Stock Dividends Average Common Stockholders' Equity ...measures the profitability from the stockholders' point of view. (Income per dollar invested) 23 Debt versus Equity Decision Debt versus Equity Decision 24 ...
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