McGraw-Hill/Irwin 13-1 © The McGraw-Hill Companies, Inc., 2005 Accounting for Corporations Chapter 13

McGraw-Hill/Irwin

13-1

© The McGraw-Hill Companies, Inc., 2005

Accounting for CorporationsChapter

1313

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Learning objectivesLearning objectives

1. Corporate form of organization

2. Common Stock

3. Preferred Stock

4. Dividends

5. Treasury Stock

6. Reporting Income and Equity

7. Decision analysis: • BPS• Dividend yield• PE ratio

• Case: Pfizer, Johnson & Johnson, Eli Lilly

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Privately HeldPrivately HeldPrivately HeldPrivately Held

Publicly HeldPublicly HeldPublicly HeldPublicly Held

Ownership can be

1. Corporate Form of Organization1. Corporate Form of Organization

Existence is separate from

owners.

Existence is separate from

owners.

An entity created by law.

An entity created by law.

Has rights and privileges.

Has rights and privileges.

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Advantages

Separate Legal Entity

Limited Liability of Stockholders

Transferable Ownership Rights

Continuous Life

Stockholders Are Not Corporate Agents

Ease of Capital Accumulation

Disadvantages

Governmental Regulation

Corporate Taxation

Advantages

Separate Legal Entity

Limited Liability of Stockholders

Transferable Ownership Rights

Continuous Life

Stockholders Are Not Corporate Agents

Ease of Capital Accumulation

Disadvantages

Governmental Regulation

Corporate Taxation

1. Corporate Form of Organization - Characteristics of Corporations

1. Corporate Form of Organization - Characteristics of Corporations

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StockholdersStockholders

Board of DirectorsBoard of Directors

President, Vice-President, President, Vice-President, and Other Officersand Other Officers

Employees of the CorporationEmployees of the Corporation

1. Corporate Form of Organization- Organizing and Managing a Corporation

1. Corporate Form of Organization- Organizing and Managing a Corporation

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C orpo ra te O rgan iza tion C hart

Secretary V ice P residentF inance

V ice P residentP roduction

V ice P residentMarketing

President

Board of D irectors

S tockholdersUltimate Ultimate control.control.

Ultimate Ultimate control.control.

Stockholders Stockholders usually meet usually meet once a year.once a year.

Stockholders Stockholders usually meet usually meet once a year.once a year.

Organizing and Managing a CorporationOrganizing and Managing a Corporation

Selected by a Selected by a vote of the vote of the

stockholders.stockholders.

Selected by a Selected by a vote of the vote of the

stockholders.stockholders.

Overall Overall responsibility responsibility for managing for managing the company.the company.

Overall Overall responsibility responsibility for managing for managing the company.the company.

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Vote at stockholders’ meetings.Sell stock. Purchase additional shares of stock.Receive dividends, if any.Share equally in any assets remaining

after creditors are paid in a liquidation.

Vote at stockholders’ meetings.Sell stock. Purchase additional shares of stock.Receive dividends, if any.Share equally in any assets remaining

after creditors are paid in a liquidation.

Rights of StockholdersRights of Stockholders

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Each unit of ownership is

called a share of stock.

A stock certificate serves as proof

that a stockholder has purchased

shares.

Each unit of ownership is

called a share of stock.

A stock certificate serves as proof

that a stockholder has purchased

shares.

1. Corporate Form of Organization - Stock Certificates and Transfer

1. Corporate Form of Organization - Stock Certificates and Transfer

When the stock is sold, the stockholder

signs a transfer endorsement on the back of the

stock certificate.

When the stock is sold, the stockholder

signs a transfer endorsement on the back of the

stock certificate.

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1. Corporate Form of Organization - Basics of Capital Stock

1. Corporate Form of Organization - Basics of Capital Stock

Total amount of stock that a Total amount of stock that a corporation’s charter authorizes it to sell.corporation’s charter authorizes it to sell.

Total amount of stock that a Total amount of stock that a corporation’s charter authorizes it to sell.corporation’s charter authorizes it to sell.

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Basics of Capital StockBasics of Capital Stock

Total amount of stock that has been Total amount of stock that has been issued to stockholders.issued to stockholders.

Total amount of stock that has been Total amount of stock that has been issued to stockholders.issued to stockholders.

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Par valuePar value is an is an arbitrary amount arbitrary amount assigned to each assigned to each

share of stock when share of stock when it is authorized.it is authorized.

Par valuePar value is an is an arbitrary amount arbitrary amount assigned to each assigned to each

share of stock when share of stock when it is authorized.it is authorized.

Market priceMarket price is the is the amount that each amount that each share of stock will share of stock will

sell for in the market.sell for in the market.

Market priceMarket price is the is the amount that each amount that each share of stock will share of stock will

sell for in the market.sell for in the market.

Selling (Issuing) StockSelling (Issuing) Stock

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• Par ValuePar Value• No-Par ValueNo-Par Value• Stated ValueStated Value

Classes of StockClasses of Stock

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Par Value Stock

On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for $25 per share.

Let’s record this transaction.

Par Value Stock



Record:1. The cash received.

2. The number of shares issued × the par value per share in the Common Stock account.

3. The remainder is assigned to Contributed Capital in Excess of Par.

Record:1. The cash received.



2. Common Stock - Issuing Par Value Stock2. Common Stock - Issuing Par Value Stock

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Issuing Par Value StockIssuing Par Value Stock

Par Value Stock



Par Value Stock



Sept. 1 Cash 2,500,000 Common stock, $2 par value 200,000

Contributed capital in excess of par value 2,300,000

Sold and issued 100,000 shares of common stock

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Issuing Par Value StockIssuing Par Value Stock

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Record:1. The asset received at its market value.



Record:1. The asset received at its market value.



Issuing Stock for Noncash AssetsIssuing Stock for Noncash Assets

Par Value Stock

On September 1, Matrix, Inc. issued 100,000 shares of $2 par value stock for land valued at

$2,500,000. Let’s record this transaction.

Par Value Stock



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Issuing Stock for Noncash AssetsIssuing Stock for Noncash Assets

Sept. 1 Land 2,500,000 Common stock, $2 par value 200,000

Contributed capital in excess of par value 2,300,000

Exchanges 100,000 common shares for land

Par Value Stock



Par Value Stock



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A separate class of stock, typically having priority over common shares in . . .

Dividend distributions.

Distribution of assets in case of liquidation.

A separate class of stock, typically having priority over common shares in . . .

Dividend distributions.

Distribution of assets in case of liquidation.

Usually has a stated dividend rate.

Usually has a stated dividend rate.

Normally has no voting rights.

Normally has no voting rights.

3. Preferred Stock3. Preferred Stock

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Vs. NoncumulativeCumulativeDividends in arrears must be paid before

dividends may be paid on common

stock.

Dividends in arrears must be paid before

dividends may be paid on common

stock.

Undeclared dividends from current and

prior years do not have to be paid in future

years.

Undeclared dividends from current and

prior years do not have to be paid in future

years.

3. Preferred Stock - Cumulative or Noncumulative Dividend3. Preferred Stock - Cumulative or Noncumulative Dividend

Most preferred stock is cumulative.

Most preferred stock is cumulative.

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Example: Consider the following partial Statement of Stockholders’ Equity

The Board of Directors did not declare or pay dividends in 2004. In 2005, the Board of Directors

declare and pay cash dividends of $42,000.

Cumulative or Noncumulative DividendCumulative or Noncumulative Dividend

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Cumulative or Noncumulative DividendCumulative or Noncumulative Dividend

If Preferred Stock is Noncumulative: Preferred CommonYear 2004: No dividends paid. -$ -$

Year 2005:1. Pay 2005 preferred dividend. 9,000$

2. Remainder goes to common. 33,000$

If Preferred Stock is Cumulative: Preferred CommonYear 2004: No dividends paid. -$ -$

Year 2005:1. Pay 2004 preferred dividend in arrears. 9,000$ 2. Pay 2005 preferred dividend. 9,000 3. Remainder goes to common. 24,000$

Totals 18,000$ 24,000$

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Vs. NonparticipatingParticipatingDividends may exceed a stated

amount once common

stockholders receive a dividend equal to the preferred stated

rate.

Dividends may exceed a stated

amount once common

stockholders receive a dividend equal to the preferred stated

rate.

Dividends are limited to a maximum amount

each year. The maximum is usually the stated dividend

rate.

Dividends are limited to a maximum amount

each year. The maximum is usually the stated dividend

rate.

Participating or Nonparticipating DividendParticipating or Nonparticipating Dividend

Most preferred stock is

nonparticipating.

Most preferred stock is

nonparticipating.

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Reasons for Issuing Preferred StockReasons for Issuing Preferred Stock

To raise capital without sacrificing control.

To boost the return earned by common stockholders through financial leverage.

To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low.

To raise capital without sacrificing control.

To boost the return earned by common stockholders through financial leverage.

To appeal to investors who may believe the common stock is too risky or that the expected return on common stock is too low.

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To pay a cash dividend the

corporation must have:

1. A sufficient balance in retained earnings and

2. The cash necessary to pay the dividend.

Cash Dividend Types and Frequency

73%

23%

0%

20%

40%

60%

80%

100%

Common Preferred

4. Dividends - Cash Dividends4. Dividends - Cash Dividends

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Regular cash dividends provide a return to investors and almost always affect the

stock’s market value.

Dividends

Stockholders

June30

Cash DividendsCash Dividends

Corporation

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Three important datesThree important dates

Date of Declaration

Record liabilityfor dividend.

Dividends

Date of Record

No entryrequired.

Date of Payment

Record payment ofcash to stockholders.

Entries for Cash DividendsEntries for Cash Dividends

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Date of Declaration

Record liabilityfor dividend.

Dividends

On January 19, a $1 per share cash On January 19, a $1 per share cash dividend is declared on Dana, Inc.’s dividend is declared on Dana, Inc.’s 10,000 common shares outstanding. 10,000 common shares outstanding.

The dividend will be paid on March 19 to The dividend will be paid on March 19 to stockholders of record on February 19.stockholders of record on February 19.


Jan. 19 Retained earnings 10,000 Common dividend payable 10,000

Declared $1 per share cash dividend

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Date of Record

No entryrequired.




No entry required on February 19.

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Date of Payment

Record payment ofcash to stockholders.




Mar. 19 Common dividend payable 10,000 Cash 10,000

Paid $1 per share cash dividend

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Created when a company incurs cumulative losses or pays dividends greater than total profits earned

in other years.

Deficits and Cash DividendsDeficits and Cash Dividends

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The corporation distributes additional shares of its own stock to its stockholders without

receiving any payment in return.

The corporation distributes additional shares of its own stock to its stockholders without

receiving any payment in return.

Stockholders

4. Dividends - Stock Dividends4. Dividends - Stock Dividends

Why a stock dividend?

•Can be used to keep the market price on the stock affordable.

•Can provide evidence of management’s confidence that the company is doing well.

Why a stock dividend?

•Can be used to keep the market price on the stock affordable.

•Can provide evidence of management’s confidence that the company is doing well.

100 Shares

$1 par value

HotAir, Inc.Common Stock

100 shares

$1 par

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Small Stock DividendDistribution is 25% of the previously

outstanding shares.Capitalize retained earnings for the market

value of the shares to be distributed.

Small Stock DividendDistribution is 25% of the previously

outstanding shares.Capitalize retained earnings for the market

value of the shares to be distributed.

Stock DividendsStock Dividends

Large Stock DividendDistribution is > 25% of the previously

outstanding shares.Capitalize retained earnings for the minimum

amount required by state law, usually par or stated value of the shares.

Large Stock DividendDistribution is > 25% of the previously

outstanding shares.Capitalize retained earnings for the minimum

amount required by state law, usually par or stated value of the shares.

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Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration of a small stock dividend.

Here is the stockholders’ equity section of Quest’s balance sheet prior to the declaration of a small stock dividend.

Recording a Small Stock DividendRecording a Small Stock Dividend

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On December 31, 2005, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2006. Let’s make

the December 31 entry.

On December 31, 2005, Quest declared a 2% stock dividend, when the stock was selling for $10 per share. The stock will be distributed to stockholders on January 20, 2006. Let’s make

the December 31 entry.

Recording a Small Stock DividendRecording a Small Stock Dividend

100,000 × 2% = 2,000 × $10 = $20,000100,000 × 2% = 2,000 × $10 = $20,000 2,000 × $1 par = $2,0002,000 × $1 par = $2,000

100,000 × 2% = 2,000 × $10 = $20,000100,000 × 2% = 2,000 × $10 = $20,000 2,000 × $1 par = $2,0002,000 × $1 par = $2,000

Dec. 31 Retained earnings 20,000 Common stock dividend distributable 2,000 Contributed capital in excess of par value 18,000

Declared a 2,000 shares (2%) stock dividend

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Before theBefore thestockstock

dividend.dividend.

After theAfter thestockstock

dividend.dividend.

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Router, Inc. shows the following stockholders’ equity section just prior to

issuing a large stock dividend.

Router, Inc. shows the following stockholders’ equity section just prior to

issuing a large stock dividend.

Recording a Large Stock DividendRecording a Large Stock Dividend

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On December 31, 2005, Router declared a 40% stock dividend, when the stock was selling

for $8 per share. State law requires that large stock dividends be capitalized at par

value per share.

On December 31, 2005, Router declared a 40% stock dividend, when the stock was selling

for $8 per share. State law requires that large stock dividends be capitalized at par

value per share.

50,000 × 40% = 20,000 shares × $1 par value = $20,00050,000 × 40% = 20,000 shares × $1 par value = $20,00050,000 × 40% = 20,000 shares × $1 par value = $20,00050,000 × 40% = 20,000 shares × $1 par value = $20,000

Recording a Large Stock DividendRecording a Large Stock Dividend

Dec. 31 Retained earnings 20,000 Common stock dividend distributable 20,000

Declared a 20,000 shares (40%) stock dividend

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A distribution of additional shares of stock to stockholders according to their percent

ownership.

A distribution of additional shares of stock to stockholders according to their percent

ownership.

Common Stock

$10 par value

100 shares

OldShares

NewShares Common Stock

$5 par value

200 shares

Stock SplitsStock Splits

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Thomas, Inc. has the following stockholders’ Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split.equity section just prior to a 2-for-1 stock split.Thomas, Inc. has the following stockholders’ Thomas, Inc. has the following stockholders’ equity section just prior to a 2-for-1 stock split.equity section just prior to a 2-for-1 stock split.


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After the 2-for-1 split the stockholders’ equity section After the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . .of the balance sheet looks like this . . .

After the 2-for-1 split the stockholders’ equity section After the 2-for-1 split the stockholders’ equity section of the balance sheet looks like this . . .of the balance sheet looks like this . . .

No accountingentry is made.No accountingentry is made.


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Corporations acquire shares of their own stock.

Why would acompany do

that?

Why would acompany do

that?

Use the shares to acquireUse the shares to acquirecontrol of another corporation.control of another corporation.

To avoid a hostile takeover.To avoid a hostile takeover.

Use the shares forUse the shares foremployee stock options.employee stock options.

To maintain a strong market forTo maintain a strong market forits stock or show managementits stock or show managementconfidence in the current price.confidence in the current price.

Use the shares to acquireUse the shares to acquirecontrol of another corporation.control of another corporation.

To avoid a hostile takeover.To avoid a hostile takeover.

Use the shares forUse the shares foremployee stock options.employee stock options.

To maintain a strong market forTo maintain a strong market forits stock or show managementits stock or show managementconfidence in the current price.confidence in the current price.

5. Treasury Stock5. Treasury Stock

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Treasury StockTreasury Stock

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On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for

$8,000.

On May 8, Whitt, Inc. purchased 2,000 of its own shares of stock in the open market for

$8,000.

5. Treasury Stock - Purchasing Treasury Stock5. Treasury Stock - Purchasing Treasury Stock

Treasury stock is shown as a reduction in totalTreasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.stockholders’ equity on the balance sheet.

Treasury stock is shown as a reduction in totalTreasury stock is shown as a reduction in totalstockholders’ equity on the balance sheet.stockholders’ equity on the balance sheet.

May 8 Treasury stock, common 8,000 Cash 8,000

Purchase 2,000 treasury shares at $4 per share

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On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.

On June 30, Whitt sold 100 shares of its treasury stock for $4 per share.

5. Treasury Stock - Selling Treasury Stock at Cost5. Treasury Stock - Selling Treasury Stock at Cost

$8,000 ÷ 2,000 shares = $4 cost per treasury share$8,000 ÷ 2,000 shares = $4 cost per treasury share

June 30 Cash 400 Treasury stock, common 400

Sold 100 shares of treasury for $4 per share

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On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per

share.

On July 19, Whitt, Inc. sold an additional 500 shares of its treasury stock for $8 per

share.

Selling Treasury Stock Above CostSelling Treasury Stock Above Cost

July 19 Cash 4,000 Treasury stock, 2,000 Contributed capital, treasury stock 2,000

Sold 500 treasury shares for $8 per share

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On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per

share.

On August 27, Whitt sold an additional 400 shares of its treasury stock for $1.50 per

share.

Selling Treasury Stock Below CostSelling Treasury Stock Below Cost

Aug. 27 Cash 600

1,000 Treasury stock, 1,600

Sold 500 treasury shares for $1.50 per share

Contributed capital, treasury stock

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On October 21, Whitt sold an 1000 shares of its treasury stock for $2 per share.

On October 21, Whitt sold an 1000 shares of its treasury stock for $2 per share.

Selling Treasury Stock Below CostSelling Treasury Stock Below Cost

Oct. 21 Cash 2,000

1,000

1,000

Treasury stock, common 4,000

Sold 1000 treasury shares for $2 per share

Contributed capital, treasury stock

Retained Earning

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Net IncomeNet IncomeNet IncomeNet Income

6. Reporting Income and Equity6. Reporting Income and Equity

DiscontinuedSegments

Changes inAccounting

Principle

ExtraordinaryItems

ContinuingOperations

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Revenues, expensesRevenues, expensesand income generatedand income generated

by the company’sby the company’scontinuing operations.continuing operations.

Revenues, expensesRevenues, expensesand income generatedand income generated

by the company’sby the company’scontinuing operations.continuing operations.

6. Reporting Income and Equity - Continuing Operations6. Reporting Income and Equity - Continuing Operations

Net IncomeNet IncomeNet IncomeNet IncomeContinuingOperations

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Income from operating the discontinued segment prior Income from operating the discontinued segment prior to its disposal to its disposal andand gain or loss on the sale of the net gain or loss on the sale of the net

assets of the segment.assets of the segment.

Income from operating the discontinued segment prior Income from operating the discontinued segment prior to its disposal to its disposal andand gain or loss on the sale of the net gain or loss on the sale of the net

assets of the segment.assets of the segment.

6. Reporting Income and Equity - Discontinued Segments6. Reporting Income and Equity - Discontinued Segments


DiscontinuedSegments

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A gain or loss thatA gain or loss thatis is unusualunusual in nature in nature

and and infrequentinfrequent in inoccurrence.occurrence.

A gain or loss thatA gain or loss thatis is unusualunusual in nature in nature

and and infrequentinfrequent in inoccurrence.occurrence.

6. Reporting Income and Equity - Extraordinary Items6. Reporting Income and Equity - Extraordinary Items


ExtraordinaryItems

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The increase or The increase or decrease in income decrease in income when changing fromwhen changing from

one generally acceptedone generally acceptedaccounting principle to accounting principle to

another.another.

The increase or The increase or decrease in income decrease in income when changing fromwhen changing from

one generally acceptedone generally acceptedaccounting principle to accounting principle to

another.another.

6. Reporting Income and Equity - Changes in Accounting Principles6. Reporting Income and Equity - Changes in Accounting Principles


Changes inAccounting

Principle

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Income StatementIncome Statement

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Campus, Inc. prepared the following schedule in connection with its change from double-

declining balance to straight-line depreciation for an asset purchased in 2003.

Campus is subject toa 20% income tax rate.Campus is subject toa 20% income tax rate.

Changes in Accounting PrinciplesChanges in Accounting Principles

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Campus, Inc. prepared the following schedule in connection with its change from double-

declining balance to straight-line depreciation for an asset purchased in 2003.

The change from DDB to SL would result in

an after-tax increase in 2005’s net income of

$48,000.

The change from DDB to SL would result in

an after-tax increase in 2005’s net income of

$48,000.

Changes in Accounting PrinciplesChanges in Accounting Principles

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Earnings per share is one of the most widely cited items of accounting information.

Earnings per share is one of the most widely cited items of accounting information.

6. Reporting Income and Equity - Earnings Per Share6. Reporting Income and Equity - Earnings Per Share

Basicearningsper share

= Net income - Preferred dividends Weighted-average common shares outstanding

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Derby, Inc. reports net income of $75,000 and paid preferred dividends of $10,000 during 2005. The company started the year with

10,000 shares of common stock outstanding. Derby sold an additional 4,000 share of stock on March 31, and purchased 2,000 treasury

shares on September 30, 2005.




Calculating Shares OutstandingCalculating Shares Outstanding

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EPS = EPS = $75,000 - $10,000 $75,000 - $10,000

12,50012,500 = = $5.20$5.20

Earnings Per ShareEarnings Per Share







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The right to purchase common stock at a fixed price over a specified period of time. As the

stock’s price rises above the fixed option price, the value of the option increases.

The right to purchase common stock at a fixed price over a specified period of time. As the

stock’s price rises above the fixed option price, the value of the option increases.

Optionpurchaseprice $30 per share.

6. Reporting Income and Equity - Stock Options6. Reporting Income and Equity - Stock Options

Marketprice of

stock $75 per share.

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Options are given to key employees to motivate them to:

focus on company performance,take a long-run perspective, andremain with the company.

Options are given to key employees to motivate them to:

focus on company performance,take a long-run perspective, andremain with the company.

Stock OptionsStock Options

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Total cumulative amount of reported net income less any net losses and dividends declared

since the company started operating.

Total cumulative amount of reported net income less any net losses and dividends declared

since the company started operating.

6. Reporting Income and Equity - Statement of Retained Earnings6. Reporting Income and Equity - Statement of Retained Earnings

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LegalLegal ContractualContractual

Most states restrictthe amount oftreasury stock

purchases to theamount of retained

earnings.

Most states restrictthe amount oftreasury stock

purchases to theamount of retained

earnings.

Loan agreementscan include

restrictions on paying

dividends below acertain amount ofretained earnings.

Loan agreementscan include

restrictions on paying

dividends below acertain amount ofretained earnings.

Restricted Retained EarningsRestricted Retained Earnings

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A corporation’s directors can voluntarily limit dividends because of a special need for cash

such as the purchase of new facilities.

A corporation’s directors can voluntarily limit dividends because of a special need for cash

such as the purchase of new facilities.

Appropriated Retained EarningsAppropriated Retained Earnings

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Correction of material errors in past years’ financial statements. If an amount is incorrectly

expensed, add amount to Retained Earnings.

Prior Period AdjustmentsPrior Period Adjustments

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(In millions) Retained

Shares Amount Earnings TotalBalance at January 1, 2005 821 2,500$ 9,500$ 12,000$ Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150) Other, net 70 70 Net income 5,100 5,100 Balance at December 31, 2005 821 2,740$ 13,595$ 16,335$

Common stock and capital in excess of par

Matrix, Inc.

Statement of Stockholders' Equity

For the Year Ended December 31, 2005

(In millions) Retained

Shares Amount Earnings TotalBalance at January 1, 2005 821 2,500$ 9,500$ 12,000$ Stock sales 17 500 500 Stock repurchases and retirement (17) (260) (925) (1,185) Cash dividends declared (150) (150) Other, net 70 70 Net income 5,100 5,100 Balance at December 31, 2005 821 2,740$ 13,595$ 16,335$

Common stock and capital in excess of par

Matrix, Inc.

Statement of Stockholders' Equity

For the Year Ended December 31, 2005

6. Reporting Income and Equity - Statement of Stockholders’ Equity6. Reporting Income and Equity - Statement of Stockholders’ Equity

This is a more inclusive statement than the statement of retained earnings.

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Records amount of stockholders’ equity applicable to common shares on a per

share basis.

Records amount of stockholders’ equity applicable to common shares on a per

share basis.

7. Decision Analysis - Book Value per Share—Common7. Decision Analysis - Book Value per Share—Common

Book value per Book value per common sharecommon share

==

Stockholders’ equity applicable to common shares

Number of common shares outstanding

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Records amount of stockholders’ equity applicable to preferred shares on a per

share basis.

Records amount of stockholders’ equity applicable to preferred shares on a per

share basis.

Book Value per Share—PreferredBook Value per Share—Preferred

Book value per Book value per preferredpreferred share share

==

Stockholders’ equity applicable to preferred shares

Number of preferred shares outstanding

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Tells us the annual amount of cash dividends distributed to common stockholders relative to

the stock’s market price.

Tells us the annual amount of cash dividends distributed to common stockholders relative to

the stock’s market price.

7. Decision Analysis - Dividend Yield7. Decision Analysis - Dividend Yield

DividendDividendYieldYield

== Annual cash dividends per share Annual cash dividends per share

Market value per shareMarket value per share

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This ratio reveals information about the stock market’s This ratio reveals information about the stock market’s expectations for a company’s future growth in expectations for a company’s future growth in

earnings, dividends, and opportunities.earnings, dividends, and opportunities.

This ratio reveals information about the stock market’s This ratio reveals information about the stock market’s expectations for a company’s future growth in expectations for a company’s future growth in

earnings, dividends, and opportunities.earnings, dividends, and opportunities.

If earnings go up,will the market priceof my stock follow?

7. Decision Analysis - Price Earnings7. Decision Analysis - Price Earnings

Price-Price-EarningsEarnings ==

Market value per shareMarket value per share Earnings per shareEarnings per share

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Case- Pharmaceutics IndustryCase- Pharmaceutics Industry

1. Industry Background

• Technology intensive

• Strict Patent protection in US

• Highly profitable

• Non-cyclical at all

2. Key success factor

• R&D capability

• Marketing capability to Medical Doctors

• Blockbuster medicines are key

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Stock Price & EarningsStock Price & EarningsPri ce & EPS

0. 00

0. 50

1. 00

1. 50

2. 00

2. 50

3. 00

3. 50

1940 1950 1960 1970 1980 1990 2000 2010

Year

0. 00

10. 00

20. 00

30. 00

40. 00

50. 00

60. 00

70. 00

EPS Pri ce

What drive the

stock price?

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Volatility of Price Earnings RatioVolatility of Price Earnings RatioPE Rati o

0. 00

10. 00

20. 00

30. 00

40. 00

50. 00

60. 00

70. 00

1940 1950 1960 1970 1980 1990 2000 2010

Year

0. 00

10. 00

20. 00

30. 00

40. 00

50. 00

60. 00

70. 00

PE Rati o Pri ce

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End of Chapter 13End of Chapter 13

Documents

McGraw-Hill/Irwin 13-1 © The McGraw-Hill Companies, Inc., 2005 Accounting for Corporations Chapter 13