CHAPTER16 Stockholders' Equity Retained earnings

2 analysis several ratios use stockholders equity

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2. Analysis. Several ratios use stockholders' equity amounts to evaluate a company's profitability and long-term solvency. a. Rate of return on common stock equity = Net income – Preferred dividends Average common stockholders' equity
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(1) Trading on the equity at a gain. When the return on total assets is lower than the rate of return on the common stockholders’ investment. b. Payout ratio = Cash dividends Net income – preferred dividends c. Price earnings ratio = Market price of stock Earnings per share d. Book value per share = Common stockholders' equity Outstanding shares Teaching Tip Illustration 16-4 presents the ratios using stockholders’ equity amounts used to measure profitability and long-term solvency. G. Appendix 16 A. Quasi-Reorganization. A procedure which eliminates an accumulated deficit and permits a firm to proceed on much the same basis as if it had been legally reorganized, without the difficulty and expenses of an actual reorganization. It permits the firm to resume payment of dividends. 1. Factors leading toward quasi-reorganization. a. Negative retained earnings (deficit). b. Good future prospects. c. Need for capital to take advantage of future prospects. d. Inability to obtain capital because of inability to pay cash dividends. 2. Quasi-reorganization steps.
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a. Assets revalued at their current value and liabilities at their present value. (1) Net of these adjustments recorded in the retained earnings. b. Par value reduced. c. Deficit written off against paid-in capital. 3. Subsequent disclosures.
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