ACCT Ch.15 Flashcards
No income or loss can arise between ____
the firm and its owners
____ are not expenses that reduce net income
dividend payments to shareholders
___ equity shares sold to investors
common stock
___ the shareholders potential loss is limited to the original purchase price of the common stock
limited liability
common stock conveys ____ and ____
ownership
limited liability
____ per share dollar amount printed on each stock certificate
par value
face value
___ when a corporation buys back its own shares and holds them for later use
treasury stock
What are the 5 reasons why firms reacquire their own stock?
- employee stock option redemption
- company shares are undervalued
- distribute surplus cash to shareholders
- offset share dilution
- boost EPS
Why would a company want to boost EPS?
camouflage business slowdowns
Reasons why shareholders would sell their stock back to firms
- capture a price premium
- lower tax rate
Reasons why shareholders wont sell their stock back to firms
capture an above market return on their investment
___ the amount over and above the cash needed for day to day operating activities
surplus cash
How can surplus cash be a problem for management?
an investor man use the company’s own cash surplus to partially finance a hostile takeover
How can surplus cash be a problem for investors?
management might spend the surplus on unprofitable projects and lavish “perks”
What are the 3 benefits of preferred stocks to investors?
- holders must be paid their dividends in full before a distribution to common shareholders
- if the company is liquidated, preferred holders must receive cash or other assets at least equal to the par value of their shares before any assets are distributed to common holders
- tax incentives
preferred share dividends are expressed as ____
a percentage of the stated value
What is a disadvantage of preferred stock to investors?
they hold no voting rights
What are the 3 reasons why corporations issue preferred stock?
- less risky than debt
- treated as equity rather than debt on financial statements
- a new source of money for companies who no longer have tax advantages from loss
___ requires the issuing company to retire it (as with debt) at some future date– 5-10 years
mandatory redeemable preferred stock
many consider mandatory redeemable preferred stock to be ___
debt disguised as equity
____ the issuing company has the option, but not the obligation, to redeem
redeemable preferred stock
The SEC requires companies to differentiate between ____ on the balance sheet
common and preferred stock
GAAP requires companies to disclose the dollar amount of ____ for each of the 5 years following the BS due date
preferred stock redemption requirements
___ law governs corporate dividend distributions to shareholders
state law
Why does the law govern dividend distribution to shareholders?
with the intent to prohibit companies from distribute excessive assets to owners and becoming incapable of paying creditors
___ used to evaluate day to day valuation of a firm
earnings per share
___ exists when a company has no convertible securities and no stock options or warrants outstanding
simple capital structure
When a company has a simple capital structure, it uses ____ to make day to day valuations
basic EPS
How do you find basic EPS?
EPS=(NI-preferred dividends)/weighted average# of common shares
___ exists when a firms financing includes either securities that can be converted into common stock or options and warrants that entitle holders to obtain common stock under specified conditions
complex capital structure
___ corporate securities, usually in the form of preferred shares, that are exchangeable for other securities such as common shares at the option of the securities holder
convertables
convertibles increase the likelihood that ___
additional common shares will be issued in the future
Companies with a complex capital structure must use ___ to make day to day valuations
diluted EPS
___ once additional common shares are issued, those who did not receive any of the new shares own a smaller slice of the company
potencial dilution
What are 3 reasons why EPS can be misleading?
- managers can distort reported earnings (EPS numerator)
- stock repurchase can be used to distort EPS denominator
- EPS ignores the capital required to generate reported earnings
___ gives the right, but not the obligation, to purchase stock at a specified price within a certain time period
stock option
___ the specified price, usually equal or higher than the market price of the shares at the time the option is issued
exercise price
When the excise price exceeds the current share price, the stock option is____
“out of money”
What are 3 reasons why companies use stock options for compensation?
- to align employee and owner’s interest
- start ups and high growth companies may be cash starved
- tax savings
What question is at the heart of the stock option debate?
should stock options be recorded as a current years expense or when the employee receives cash?
What are the 5 pro expense stock option arguments?
- 75% of executive pay are options
- more accurate
- there are some costs involved
- wont get $ from selling stock
- executives have incentives to pump up stock price for short run maneuvers
What are the 5 non-expense stock option arguments?
- no cash outlay
- no universal standard for evaluating option
- valuations are based on assumptions and estimates
- used for aligning interests of managers and shareholders
- tech firms and innovation depends on options
What is the current GAAP requirements for stock options?
requires firms to record options as compensation expense at grant date value
Stock options have declined since ____
2000
___ shares issued to employees that can be sold only in the future after the stock vests (lets say 3 years)
restricted stock
What is a popular alternative to stock options?
restricted stock
If an employee with a restricted stock leaves the company during the vesting period, what happens?
they lose their shares
