Distributions and Common Stock Valuation

Question 1

Stock Dividends

Answer 1

Any stock distribution that involves less than 25% of the outstanding shares.
It involves giving additional shares to existing stockholders instead of a cash dividend. The % indicates how many additional shares the shareholder receives. As a result the total number of shares outstanding increases but the value of each outstanding share decreases (proportionally reduced i.e. the value of what the stockholder owns is unchanged )
I am assuming this involves issuing more stock

Question 2

Stock Split

Answer 2

Increases or decreases number of outstanding shares. The price per share is proportionally reduced/increased
Involves 25% or more of the outstanding shares
Forward split - you get more stock
Reverse split - you get less stock
I am assuming this involves issuing more stock

Question 3

Stock split calculations

Answer 3

e.g. 5:4 means 5 for 4. The number of shares now owned is original number * 5 / 4
If I owned 100 and got a 5:4 stock split I would now have 100 * 5/4 = 125

Question 4

Net Worth on Balance Sheet

Answer 4

Total Assets - Total Liabilities = Net Worth
Total Assets = Total Liabilities (amts that can be claimed by creditors) + Net Worth (stockholders equity)

Question 5

Inventory Valuation

Answer 5

FIFO - first item in stock are first to leave when sale is made (increases reported profit during times of inflation)
LIFO - last item in stock is first to leave when sale is made (decreases reported profit during times of inflation)

Question 6

Earnings per common share formula

Answer 6

= Earnings Available for Common Shareholders / Common Shares Outstanding (specified as $/share)

Earnings Available for Common Shareholders = Net Income After Tax - Dividends paid to Preferred Shareholders

Common Shares Outstanding will be listed in the Stockholders Equity section of the Balance Sheet

Question 7

Dividend Yield formula

Answer 7

This shows the dividend or current yield

= annual dividend / market price (specified as percentage)
NOTE: Make sure to include the annual dividend (not the quarterly one)

Question 8

Price/Earnings ratio (P/E ratio) or the Company’s Multiple

Answer 8

Market price of stock / earnings per share (specified as a numeric value)
e.g. if the value is 15, you say the company is trading at a price that is 15 times current earnings. This value is also called the company’s multiple.

The earning per share value is covered on another flashcard

Question 9

Tax implications of stock splits and stock dividends

Answer 9

There is no immediate economic benefit for the shareholder so a stock split is not taxable but results in an adjustment of the position’s tax (cost) basis

Question 10

What are preemptive rights

Answer 10

Shareholder right to keep proportional ownership in the company if the company decides to issue more shares. A right is a security issued by the company to shareholders prior to issuing new shares to the public. They are short term securities that give the owner the option to buy a certain number of shares at a reduced price over a short period of time