Chapter 11 Flashcards
Shareholder’s rights
- Voting (in person or by proxy)
- Getting dividends
- Proportionate distributions of assets in a liquidation
Who appoints the Board of Directors?
The shareholders (owners of voting shares)
Who appoints the president?
Board of Directors
What is authorized shares?
The maximum number of shares that can be sold to the public. This is frequently set to an unlimited amount to provide maximum flexibility to the corporation.
What is issued shares?
Issued shares are authorized shares that have been sold
What is unissued shares?
Unissued shares are authorized shares that never have been sold
What 2 shares are under issued shares?
- Outstanding shares
- Treasury shares
Outstanding shares
Issued shares that are owned by the shareholders
Treasury shares
issued shares that have been reacquired by the corporation. In Canada, reacquired shares are usually canceled.
2 primary sources of shareholder’s equity!
- Contributed Capital (Common and preferred shares + Contributed surplus)
- Retained Earnings
Contributed capital
Amount invested by shareholders
2 components of contributed capital
- Amounts initially received from the sale of shares
- Contributed surplus that reflects contributions made by shareholders in excess of the amounts credited to share capital accounts.
Retained earnings
Cumulative amounts of net earnings generated since the organization of the corporation less the cumulative amount of dividends paid by the corporation since organization
2 Types of share capital
- Common shares
- Preferred shares
Common share transactions
- Basic voting shares
- Ranks after preferred shares
- Dividends set by Board of Directors
Initial Sale of Shares
- Initial Public Offering (IPO)
The first time a corporation sells shares to the public - Seasoned new issue
Subsequent sales of new shares to the public
2 rules if shares are issued for non-cash assets and/or services
- Record assets or services received at the market value of the shares given up at the date of the transaction.
- If the market value of the shares cannot be determined, then the market value of the assets or services received should be used
Reasons for reacquisition of a corporation’s own shares
- Reduce shares outstanding to increase EPS
- Have enough shares on hand to meet employee share compensation contracts
- Buy out a particular ownership interest
- Meet the needs of a potential merger
- Stop (or slow down) takeover attempts
- Reduce the number of shareholders
- Make a market in the company’s shares
- Return cash to shareholders
Dividends on Common Shares
- Declared by the Board of Directors
- Not legally required
- Creates liability at declaration
- Requires sufficient retained earnings and cash
What is stock dividends
Distribution of additional shares to the shareholders
- No change in total shareholder’s equity
- Retained earnings decrease
- All shareholders retain same percentage ownership
When is stock dividend considered small?
Stock dividend < 20-25% –> Record at current market value per share
When is stock dividend considered large?
Stock dividend > 20-25% –> Record at current average issue price per share
What is preferred shares?
- NO VOTING RIGHTS
- Preference over common shares
- Has a fixed dividend rate
Types of Preferred Shares
- Cumulative
- Convertible
- Callable/Redeemable
- Retractable
Cumulative shares
Dividends in arrears must be paid before any profits can be distributed to common shareholders
Convertible shares
The company or holder can exchange the shares for common shares at a predetermined ratio
Callable/Redeemable shares
The issuing company can “call” at its option the preferred shares at specified future dates at stipulated prices
Retractable shares
The holders can “put” (or sell) their shares to the company
Dividends on Preferred Shares
- Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common shares.
- Cumulative Dividend Preferences: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
If the preferred shares are non-cumulative, any dividends not declared in previous years are lost permanently.
Additional components of SE other than contributed capital
Retained earnings
Accummulated Other Comprehensive Income (Loss)
Earnings Per Share (EPS) Ratio
EPS = Net Earnings Available to Common Shareholders / Average Number of Shares Outstanding for the Period
Earnings per share is the most widely watched financial ratio.
