McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11
Stockholders’ Equity
PowerPoint Authors:Brandy MackintoshLindsay Heiser
11-2
Learning Objective 11-1
Explain the role of stock in financing a corporation
11-3
Corporate OwnershipThe major advantage of the corporate form of business
is the ease of raising capital as both large and small investors can participate in corporate ownership.
Simple to become an
owner
Easy to transfer
ownership
Provides limited liability
Because a corporation is a separate legal entity, it can Own assets. Incur liabilities. Sue and be sued. Enter into contracts.
11-4
Voting rights.
Dividends.
Residual claims.StockholderBenefits
Corporate Ownership
Preemptive rights.
11-5
Corporate Ownership
11-6
Equity Versus Debt Financing
Advantages of equity • Equity does not have to
be repaid.
• Dividends are optional.
Advantages of debt• Interest on debt is tax
deductible.
• Debt does not change stockholder control.
Advantages of equity and debt financing.Advantages of equity and debt financing.
11-7
Learning Objective 11-2
Explain and analyze common stock transactions.
11-8
Common Stock Transactions
Stockholders’ Equity
Contributed Capital
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income
11-9
Authorization, Issuance, and Repurchase of Stock
The maximum number of shares of capital stock that can be
issued to the public.
Issued shares are authorized shares of stock that have been
distributed to stockholders.
Unissued shares of stock are
shares that have never
been distributed to stockholders.
UnissuedShares
TreasuryShares
OutstandingSharesIssued
SharesTreasury shares are
issued shares that have been reacquired by the
corporation.
Outstanding shares are issued shares that are
owned by stockholders.
AuthorizedShares
11-10
Authorization, Issuance, and Repurchase of Stock
11-11
Par value is typically a very nominal amount such a $0.01
per share.
Stock Authorization
Par value is an arbitrary amount assigned to each
share of stock when it is authorized.
Par value is an arbitrary amount assigned to each
share of stock when it is authorized.
Market price is the amount that each
share of stock will sell for in the market.
11-12
Some states do not
require a par value to be
stated in the charter.
No-par Stock
Stock Authorization
11-13
Stock Issuance
Initial public offering (IPO)
The first time a corporation issues stock to the public.
Seasoned new issue
Subsequent issues of new stock to the
public.
National Beverage
issues stock.
11-14
Most issues of stock to the public are cash transactions.
Stock Issuance
National Beverage issued 100,000 shares of$0.01 par value common stock for $10 per share.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +1,000,000 Common Stock +1,000Additional Paid-InCapital +999,000
2 Record
dr Cash (+A) (100,000 x $10) cr Common Stock (+SE) (100,000 x $0.01) cr Additional Paid-In Capital (+SE) (1,000,000 – 1,000)
1,000
999,000
1,000,000
11-15
Stock Exchanged between Investors
Transactions between two investors do not affect the corporation’s accounting records.
I’d like to sell 100 shares of National Beverage stock.
I’d like to buy 100 shares of National
Beverage stock.
11-16
Stock Used to Compensate Employees
Employees pay packages can include stock
options
Gives the employees the option to acquire company stock at a predetermined price
If the employees work hard and meet the corporation’s goals the stock price will increase.
Employees can then exercise their option to acquire stock at the lower predetermined price
and sell it at the higher price for a profit.
11-17
Repurchase of Stock
A corporation repurchases its stock to: Distribute excess cash to stockholders. Send a signal that the company believes
its stock is worth acquiring. Obtain shares to reissue for the purchase
of other companies. Obtain shares to reissue to employees as
part of stock option plans.
11-18
Repurchase of StockNational Beverage
repurchases its own stock
(Treasury stock)
Stockholders
Stock options allow employees to purchase
stock from the corporation at a fraction of the stock’s
market price.
Employee
Employee compensation
package includes salary plus stock
options.
11-19
No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
Treasury stock is not
an asset.
Repurchase of Stock
11-20
National Beverage reacquired 50,000 sharesof its common stock at $25 per share.
Repurchase of Stock
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash -1,250,000 TreasuryStock (+xSE) -1,250,000
2 Record
dr Treasury Stock (+xSE, -SE) cr Cash (-A) 1,250,000
1,250,000
11-21
Reissuance of Treasury Stock
National Beverage reissued 5,000 sharesof the Treasury Stock at $28 per share.
No profit or loss is recognized on treasury stock transactions.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +140,000 Treasury Stock (-xSE) +125,000Additional Paid-InCapital +15,000
2 Record
dr Cash (+A) (5,000 x $28) cr Treasury Stock (-xSE, +SE) (5,000 x $25) cr Additional Paid-In Capital (+SE) [5,000 x ($28 - $25)]
125,000
15,000
140,000
11-22
Learning Objective 11-3
Explain and analyze cash dividends, stock dividends, and stock split transactions.
11-23
Dividends on Common Stock
Declared by board of directors.
Not legally required.
Creates liability at declaration.
Requires sufficient Retained Earnings and Cash.
11-24
Dividends Dates
11-25
Dividends Dates
National Beverage declares an $2.30 dividend on each share of its 46,200,000 shares of common stock outstanding.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
DividendsPayable +106,260,000
DividendsDeclared (+D) -106,260,000
2 Record
dr Dividends Declared (+D, -SE) cr Dividends Payable (+L) 106,260,000
106,260,000
11-26
Dividends Dates
National Beverage paid the previously declared $2.30dividend on its shares of common stock outstanding.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash -106,260,000 DividendsPayable -106,260,000
2 Record
dr Dividends Payable (-L) cr Cash (-A) 106,260,000
106,260,000
11-27
No change in total stockholders’ equity.
No change inpar values.
All stockholders retain same percentage ownership.
Stock Dividends
Corporations issue stock dividends to: Remind stockholders of the accumulating wealth in the company. Reduce the market price per share of stock. Signal that the company expects strong financial performance
in the future.
Distribution of additional sharesof stock to stockholders.
11-28
Record at currentmarket value
of stock.
Record atpar valueof stock.
Small Large
The journal entry moves an amount fromRetained Earnings to other equity accounts.
Stock Dividends
Stock dividend > 20 – 25%Stock dividend < 20 – 25%
11-29
National Beverage issued a 20 percent stock dividend on 38,000,000 outstanding shares of its $0.01 par value common stock and accounted for it as a large stock
dividend.
Stock Dividends
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Retained Earnings -76,000Common Stock +76,000
2 Record
dr Retained Earnings (-SE) cr Common Stock (+SE) 76,000
76,000
11-30
Stock Splits
An increase in the number of shares and a corresponding decreasein par value per share. Retained earnings is not affected.
A stock split creates more pieces of the same pie.
Assume that a corporation had 1,000,000 shares of $0.01 par value common stock outstanding before a 2–for–1 stock split.
11-31
Comparison of Distributionsto Stockholders
11-32
Learning Objective 11-4
Describe the characteristics of preferred stock and analyze
transactions affecting preferred stock.
11-33
Preferred Stock Issuance
National Beverage issued 10,000 shares of its$1 par value preferred stock for $5 per share.
Usually has no voting rights
Usually has a fixed dividend ratePreferred Stock
Priority over common stock
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +50,000
Preferred Stock +10,000 Additional Paid-In Capital Preferred +40,000
2 Record
dr Cash (+A) (10,000 x $5) cr Preferred Stock (+SE) (10,000 x $1) cr Additional Paid-In Capital – Preferred (+SE)
10,00040,000
50,000
11-34
Preferred Stock Dividends
• Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
• Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
If the preferred stock is noncumulative, any dividends not declared in previous years are lost
permanently.
11-35
Assume the preferred stock of Flavoria carries only a current dividend preference and that the company declares dividends totaling $8,000 in 2012 and $10,000 in 2013. How much would
the preferred and common stockholders receive in 2012 and 2013?
Preferred Stock Dividends
11-36
Preferred Stock Dividends
11-37
Assume that Flavoria Company has the same amount of stock outstanding. However assume that dividends are in arrears for 2010 and 2011.
How much would the preferred and common stockholders receive in 2012 and 2013?
Preferred Stock Dividends
11-38
Preferred Stock Dividends
11-39
Retained EarningsTotal cumulative amount of reported net income less any
net losses and dividends declared since the company started operating.
Baker Company incurred a loss of $120,000 in 2013 thatresulted in an Accumulated Deficit in Retained Earnings.
Baker CompanyComparative Balance Sheets (Partial)
For Year Ended December 31
Stockholders’ Equity Common Stock Additional Paid-in Capital Retained Earnings (Deficit) Total Stockholders’ Equity
2014
$ 100,000750,000 50,000900,000
2013
$ 100,000750,000(70,000) 780,000
11-40
Learning Objective 11-5
Analyze the earnings per share (EPS), return on equity
(ROE), and price/earnings (P/E) ratios.
11-41
Net Income
Average Number of Common Shares OutstandingEPS =
National Beverage’s income for 2011 was $40,800,000 and the average number of shares
outstanding during the year was 46,200,000.
Earnings per share is probably the single most widely watched financial ratio.
Earnings Per Share (EPS)
$40,800,000
46,200,000 SharesEPS = = $0.88 per share
11-42
Return on Equity (ROE)
Net Income
Average Stockholders’ EquityROE =
National Beverage’s income for 2011 was $40,800,000 and the average Stockholders’
Equity was $110,950,000.
Return on equity is the amount earned for each dollar invested by stockholders.
$40,800,000
$110,950,000ROE = = 36.8 percent
11-43
Price/Earnings (P/E) Ratio
Current Stock Price (per share)
Earnings Per Share (annual)P/E =
The P/E ratio is a measure of the value that investors place on a company’s common stock.
National Beverage’s stock price was $15.10 whenthe company reported its 2011 EPS of $0.88.
$ 15.10
$ 0.88P/E = = 17.2
11-44
Comparison of EPS, ROE,and P/E Ratios
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Supplement 11A
Owners’ Equity for Other Forms of Business
11-46
Owner’s Equity for a Sole Proprietorship
Only two owner’sequity accounts.
A Withdrawal accountto record the owner’swithdrawals of assets.
A Capital account to recordthe owner’s investmentsand the periodic income
or loss.
Closed to the capital accountat the end of each period.
No separate retainedearnings account.
11-47
Accounting for Owner’s Equityfor a Sole ProprietorshipTo record a $150,000 investment by H. Simpson, the owner.
To record H. Simpson’s $1,000 monthly withdrawal.
11-48
Accounting for Owner’s Equityfor a Sole Proprietorship
To close revenue and expense accounts to capital.
To close the $1,000 monthly drawings to capital.
11-49
Accounting for assets, liabilities, revenues and expenses follows the same accounting principles as
any other form of business.
Accounting for partners’ equity follows the same pattern as for a sole proprietorship.
Separate Capital and Drawings accounts are maintained for each partner.
Accounting for Partnership Equity
11-50
Accounting for Partnership Equity
To record investments by partners Able and Bakerwho will divide net income as follows: Able, 60
percent and Baker 40 percent.
To record the partners’ monthly withdrawal.
11-51
Accounting for Partnership Equity
To close revenue and expense accounts to partners’ capital.
To close the monthly drawings to partners’ capital.
11-52
Other Business Forms
Limited Liability
Partnership(LLP)
• Protects innocent partners from malpractice or negligence claims.
• Most states hold all partners personally liable for partnership debts.
Limited Liability
Company(LLC)
• Owners have same limited liability feature as owners of a corporation.
• A limited liability company typically has a limited life.
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 11Solved Exercises
M11-4, M11-8, E11-3, E11-6, E11-8, E11-11, E11-19
11-54
M11-4 Analyzing and Recording the Issuance of Common StockTo expand operations, Aragon Consulting issued 1,000 shares of previously unissued common stock with a par value of $1. The price for the stock was $50 per share. Analyze the accounting equation effects and record the journal entry for the stock issuance.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +50,000
Common Stock +1,000 Additional Paid-InCapital +49,000
2 Record
dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE)
1,00049,000
50,000
11-55
M11-4 Analyzing and Recording the Issuance of Common StockWould your answer be different if the par value were $2 per share? If, so, analyze the accounting equation effects and record the journal entry for the stock issuance with a par value of $2.
The effects on total assets and total stockholders’ equity would not differ, but the amounts within the individual stockholders’ equity accounts would differ.
1 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Cash +50,000
Common Stock +2,000 Additional Paid-InCapital +48,000
2 Record
dr Cash (+A) cr Common Stock (+SE) cr Additional Paid-In Capital (+SE)
2,00048,000
50,000
11-56
M11-8 Determining the Amount of a DividendNetpass Company has 300,000 shares of common stock authorized, 270,000 shares issued, and 100,000 shares of treasury stock. The company’s board of directors declares a dividend of $1 per share of common stock. What is the total amount of the dividend that will be paid?
Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.
Shares issued
Less treasury stock
Shares outstanding
Dividend per share
Total dividends paid
270,000
100,000
170,000
x $ 1.00
$170,000
11-57
E11-3 Preparing the Stockholders’ Equity Section of the Balance SheetNorth Wind Aviation received its charter during January 2013. The charter authorized the following capital stock:
During 2013, the following transactions occurred in the order given:a. Issued a total of 40,000 shares of the common stock for $15 per share.b. Issued 10,000 shares of the preferred stock at $16 per share.c. Issued 3,000 shares of the common stock at $20 per share and 1,000 shares of the preferred stock at $16.d. Net income for the first year was $48,000.Required:Prepare the stockholders’ equity section of the balance sheet at December 31, 2013.
11-58
E11-3 Preparing the Stockholders’ Equity Section of the Balance Sheet
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
$ 430,000
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
$ 430,000
66,000
10,000 shares × ($16 – $10) + 1,000 shares × ($16 – $10)
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, $1 par, 50,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Common
$ 430,000
66,000
43,000
617,000
40,000 shares × ($15 – $1) + 3,000 shares × ($20 – $1)
North Wind Aviation
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, 8%, $10 par, 20,000 shares authorized,
11,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, $1 par, 50,000 shares authorized,
43,000 shares issued and outstanding
Additional Paid-in Capital, Common
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 110,000
66,000
43,000
617,000
836,000
48,000
$ 884,000
11-59
E11-6 Recording and Reporting Stockholders’ Equity TransactionsAvA School of Learning obtained a charter at the start of 2013 that authorized 50,000 shares of no-par common stock and 20,000 shares of preferred stock, par value $10. During 2013, the following selected transactions occurred:a. Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.b. Issued 6,000 shares of common stock to an outside investor at $40 cash per share.c. Issued 8,000 shares of preferred stock at $20 cash per share.Required:1. Give the journal entries indicated for each of these transactions.2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.
11-60
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Required:1. Give the journal entries indicated for each of these transactions.
(a) Collected $40 cash per share from four individuals and issued 5,000 shares of common stock to each.
(b) Issued 6,000 shares of common stock to an outside investor at $40 cash per share.
dr Cash (+A) (5,000 x $40 x 4) cr Common Stock (+SE) 800,000
800,000
dr Cash (+A) (6,000 x $40) cr Common Stock (+SE) 240,000
240,000
11-61
E11-6 Recording and Reporting Stockholders’ Equity Transactions
Required:1. Give the journal entries indicated for each of these transactions.
(c) Issued 8,000 shares of preferred stock at $20 cash per share.
dr Cash (+A) (8,000 x $20) cr Preferred Stock (+SE) cr Additional Paid-in Capital, Preferred (+SE)
80,00080,000
160,000
11-62
E11-6 Recording and Reporting Stockholders’ Equity TransactionsRequired:2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2013. At the end of 2013, the accounts reflected net income of $36,000. No dividends were declared.
AvA School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
$ 80,000
AvA School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
$ 80,000
80,000
8,000 shares x ($20 - $10)
AvA School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, no par, 50,000 shares authorized,
26,000 shares issued and outstanding
$ 80,000
80,000
1,040,000
(20,000 shares × $40) + (6,000 shares × ($40)
AvA School of Learning
Stockholders’ Equity
December 31, 2013
Contributed Capital:
Preferred Stock, $10 par, 20,000 shares authorized,
8,000 shares issued and outstanding
Additional Paid-in Capital, Preferred
Common Stock, no par, 50,000 shares authorized,
26,000 shares issued and outstanding
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 80,000
80,000
1,040,000
1,200,000
36,000
$1,236,000
11-63
E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactDuring 2013, the following selected transactions affecting stockholders’ equity occurred for Corner Corporation:Feb. 1 Purchased 400 shares of the company’s own common stock at $20 cash per share.Jul. 15 Issued 100 of the shares purchased on February 1, for $30 cash per share.Sept. 1 Issued 60 more of the shares purchased on February 1, for $15 cash per share.Required:1. Show the effects of each transaction on the accounting equation.2. Give the indicated journal entries for each of the transactions.3. What impact does the purchase of treasury stock have on dividends paid?4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?
11-64
E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:1. Show the effects of each transaction on the accounting equation.
1 Analyze
Date Assets = Stockholders’ Equity+
Cash - 8,000
Treasury Stock (+xSE) - 8,000
Liabilities
Feb. 1
1 Analyze
Date Assets = Stockholders’ Equity+
Cash - 8,000
Cash + 3,000
Treasury Stock (+xSE) - 8,000
Treasury Stock (-xSE) + 2,000Additional Paid-in Capital – treasury + 1,000
Liabilities
Feb. 1
Jul. 15
1 Analyze
Date Assets = Stockholders’ Equity+
Cash - 8,000
Cash + 3,000
Cash + 900
Treasury Stock (+xSE) - 8,000
Treasury Stock (-xSE) + 2,000Additional Paid-in Capital – treasury + 1,000
Treasury Stock (-xSE) + 1,200Additional Paid-in Capital – treasury - 300
Liabilities
Feb. 1
Jul. 15
Sept. 1
11-65
E11-8 Recording Treasury Stock Transactions and Analyzing Their Impact
Required:2. Give the indicated journal entries for each of the transactions.
2 Record Feb. 1
dr Treasury Stock (+xSE) cr Cash (-A) (400 x $20) 8,000
8,000
2 Record July 15
dr Cash (+A) (100 x $30) cr Treasury Stock (-xSE, +SE) cr Additional Paid-In Capital – Treasury (+SE)
2,0001,000
3,000
2 Record Sept. 1
dr Cash (+A) (60 x $15)dr Additional Paid-in Capital - Treasury (-SE) cr Treasury Stock (-xSE, +SE) (60 x $20) 1,200
900300
11-66
E11-8 Recording Treasury Stock Transactions and Analyzing Their ImpactRequired:3. What impact does the purchase of treasury stock have on dividends paid?
4. What impact does the issuance of treasury stock for an amount higher than the purchase price have on net income?
Dividends are not paid on treasury stock. Therefore, the total amount of cash dividends paid is reduced when treasury stock is purchased.
The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance
sheet accounts.
11-67
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained EarningsThe 2012 annual report for Sneer Corporation disclosed that the company declared and paid preferred dividends in the amount of $100,000 in 2012. It also declared and paid dividends on common stock in the amount of $2 per share. During 2012, Sneer had 1,000,000 common shares authorized; 300,000 shares had been issued; 100,000 shares were in treasury stock. The balance in Retained Earnings was $800,000 on December 31, 2011, and 2012 Net Income was $300,000.Required:1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.
11-68
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.
a. Preferred Stock
Declaration
dr Dividends Declared (-SE) cr Dividends Payable (+L) 100,000
100,000
Payment
dr Dividends Payable (-L) cr Cash (-A) 100,000
100,000
11-69
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.
b. Common Stock
Dividends are paid on shares that are issued and outstanding.Dividends are not paid on treasury stock.
Shares issued
Less treasury stock
Shares outstanding
Dividend per share
Total dividends paid
300,000
100,000
200,000
x $ 2.00
$400,000
11-70
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings
1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred and (b) common stock.
b. Common Stock
Declaration
dr Dividends Declared (-SE) cr Dividends Payable (+L) 400,000
400,000
Payment
dr Dividends Payable (-L) cr Cash (-A) 400,000
400,000
11-71
E11-11 Recording the Payment of Dividends and Preparing a Statement of Retained Earnings
2. Using the information given above, prepare a Statement of Retained Earnings for the year ended December 31, 2013.
Sneer Corporation
Statement of Retained Earnings
For Year Ended December 31, 2013
Retained Earnings, January 1, 2013
Plus: Net Income
Less: Dividends declared on Preferred Stock
Dividends declared on Common Stock
Retained Earnings, December 31, 2013
$ 800,000
300,000
(100,000)
(400,000)
$ 600,000
11-72
E11-19 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.
During the quarter ended March 31, 2013, SPI reported Net Income of $5,000 and declared and paid cash dividends totaling $5,000.Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.
Net Income
Average Number of Common Shares OutstandingEPS =
$5,000
50,000 SharesEPS = = $0.10 per share
11-73
E11-19 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March 31, 2013.
Net Income
Average Stockholders’ EquityROE =
$5,000
$100,000ROE = = 5.0 percent
11-74
E11-19 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.
$5,000
40,000 SharesEPS = = $0.125 per share
If 10,000 shares are repurchased on April 1, 2013, only 40,000shares would be outstanding from April 1 – June 30, 2013.
11-75
$5,000
$80,000ROE = = 6.25 percent
10,000 shares are repurchased for $20,000 on April 1, 2013, resulting in a Stockholders’ Equity balance of $80,000 from
April 1 – June 30, 2013.
E11-19 Determining the Effect of a Stock Repurchase on EPS and ROE
Required:2. Assume SPI repurchases 10,000 of its common stock at a price of $2 per share on April 1, 2013. Also assume that during the quarter ended June 30, 2013, SPI reported Net Income of $5,000, and declared and paid cash dividends totaling $5,000. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended June 30, 2013.
11-76
E11-19 Determining the Effect of a Stock Repurchase on EPS and ROESwimtech Pools Inc. (SPI) reported the following in its financial statements for the quarter ended March 31, 2013.
Required:3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact of a stock repurchase on EPS and ROE?
By repurchasing stock, a company can increase both its EPS and ROE.
11-77
End of Chapter 11