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GSU ACCT 2102 - Raising Capital through equity Financing
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ACCT 2102 Lecture 4 Lecture 5 Review (9/11)I. Debt Financing II. Risk of Debt FinancingIII. Reward of Debt FinancingIV. Equity FinancingV. Return of EquityVI. Financial RatioVII. Types of Business CombinationsVIII. Determining the Allocation of Profits/Losses in PartnershipLecture 6 (9/17)I. Raising Capital through equity FinancingA. Issuing stockB. Reinvesting retained earningsII. Stock A. Cumulative and noncumulative preference calculationB. Different number of SharesC. Issuing stockIII. Treasury StockA. DefinitionB. Effect on accounting equationIV. Values Associated with StockV. DividendsA. TypesB. Dates associated with dividendsC. Cash dividendsD. Stock Dividend v. Stock SplitCurrent Lecture Raising Capital through Equityo To raise money from its owners, a company can do two things:- Issue stock- Reinvest retained earningsThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Types of Stock Issuedo Common stock- Uses residual interest- Making investors owners of the company and giving them voting rights- Preemptive rightso Preferred stock- Gives investors some rights of ownership- Preference over common stock (but not debt) in dividends and/or liquidation(They receive their dividends quicker than common stock holders)o Most Common Preferences of Stock- Cumulative: Unpaid dividends are accumulated - Participating: Right to receive more than stated rate.- Callable: Right to repurchase at a stipulated price by corporation.- Convertible: Gives the shareholder the right to convert to other forms of capital.- Redeemable: Gives the shareholder the right to turn in stock for cashNoncumulative Dividendso There is no accumulation of unpaid dividends over yearso Meaning: In order for common shareholders to be paid dividends, preferred shareholders must be paid their dividends for the current period The company declares a $100,000 dividend. The preferred stock is noncumulative. What portionof the $100,000 will be paid to preferred and common shareholders? What is the amount paid per share? (*Dividends are paid on outstanding shares of stock*)Preferred Stock: $10 x 8% = 0.80 per share x 30,000 shares = $24,000Common Shareholders: $100,000 - $24,000 = $76,000 $76,000 ÷ 200,000 shares = $.38 per shareNumber of sharesNumber of sharesIssued Issued OutstandingOutstandingCommon stock, $1 parCommon stock, $1 par228,000228,000200,000200,000Preferred stock, 8%, $10 parPreferred stock, 8%, $10 par30,00030,00030,00030,000Cumulative Dividendso Dividends that are unpaid do accumulate over the years.o Meaning: For common shareholders to be paid their dividends, preferred shareholders must receive dividends for the current period AND all “dividends in arrears”Preferred Stock: 0.80 per share x 30,000 shares = $24,000 per year$24,000 x 3 (current plus 2 in arrears) = $72,000$72,000/30,000 = $2.40 per shareCommon Shareholders: $100,000 - $72,000 = $28,000$28,000 ÷ 200,000 shares = $.14 per shareDifferent “Numbers of Shares” in Stocko Authorized: The maximum number of shares that can be issuedo Issued: Number of shares distributed to stockholders (not retired)o Outstanding: Number of shares currently held by stockholders outside the corporationo Retired Shares: Repurchased issued that the corporation will never reissue. Reduces both issues and outstandingIssuing Stocko Issuing stock for cash causes an increase in cash, as well as, an increase in owner’s equityTreasury Stocko Treasury stock is previously issued stock that has been repurchased by the corporation.o It reduces the number of outstanding stock (the number of shares outstanding is equal to the number of shares issued less the number of shares of treasury stock)o When treasury stock is bought, assets and owner’s equity decrease.Values Associated with StockNumber of sharesNumber of sharesIssued Issued OutstandingOutstandingCommon stock, $1 parCommon stock, $1 par228,000228,000200,000200,000Preferred stock, 8%, $10 parPreferred stock, 8%, $10 par30,00030,00030,00030,000o Par- Arbitrary amount used to determine legal capital, stated in the charter. - When stock is issued for more than par value, the excess is reported in the account (Paid-in Capital in Excess of Par)o Legal Capital- Required by state law to be retained for the protection of the corporate creditors.o Market- Current selling priceTypes of Dividendso Cash: Checks written and payable to stockholderso Stock: Additional shares of stock distributed to stockholderso Property: Assets other than cash distributed to stockholders like inventory or investmentsDates for Dividendso Declaration- The amount of the dividend and the date of record and payment is determined by the board of directors. Liability is recorded and retained earnings go down.o Ex-dividend- 2 to 3 days before the date of record, investors last day to purchase stock and receivethe dividendo Record- Individual stock ownership is determined. A shareholder must own stock on date of record in order to get paid dividendo Payment- Dividends are distributedCash Dividends:- When a company declares cash dividends, its’ liabilities go up and owner’s equity go down.- When a company pays cash dividends, both assets and liabilities go down.Stock Dividend v. Stock Splito Dividend: Additional shares of stock are distributed to stockholderso Split- Old shares are turned in by stockholders and new shares with a different par value are issued in return. In a two for one stock split, the number of shares doubles.- In a reverse split, old shares are called in and replaced with a reduced number with ahigher par


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GSU ACCT 2102 - Raising Capital through equity Financing

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