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Interest Rates and Bond Prices

Interest Rates and Bond Prices. IF STATED RATE BONDS ISSUED. Above face value at a premium At face value Below face value at a discount. > MARKET RATE. = MARKET RATE. < MARKET RATE. Amortization of Bond Premiums and Discounts.

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Interest Rates and Bond Prices

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  1. Interest Rates and Bond Prices IF STATED RATEBONDS ISSUED Above face value at a premium At face value Below face value at a discount > MARKET RATE = MARKET RATE < MARKET RATE

  2. Amortization of Bond Premiums and Discounts Periodically transfer a portion of discount or premium from respective account to interest expense over the life of the bond using the effective interest method Premium reduces interest expense Discount increases interest expense LO5

  3. Reporting and InterpretingOwners’ Equity Chapter 11

  4. Certificate of Stock

  5. Incur liabilities. Own assets. Sue and be sued. Enter into contracts. Understanding The Business Advantages of a corporation Simple to become an owner Easy to transfer ownership Provides limitedliability Because a corporation is a separate legal entity, it can . . .

  6. Voting (in person or by proxy).  Proportionate distributions of profits. Stockholders’ Rights  Proportionate distributions of assets in a liquidation. Ownership of a Corporation

  7. Ownership of a Corporation Elected byshareholders Appointedby directors

  8. Expanded Accounting Equation Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings

  9. Retained Earnings Connects the Income Statement and the Balance Sheet Income Statement Revenues $ xxx Less, Expenses xxx Net Income $ inc Statement of Retained Earnings Retained Earnings, Beginning Balance $ xxx Add, Net Incomeinc Deduct, Dividends xxx Retained Earnings, Ending Balance $ end Balance Sheet Total Assets $ xxx Total Liabilities xxx Stockholders’ Equity xxx Retained Earnings end Total Liabilities and Stockholders' Equity $ xxx

  10. Stockholders’ Equity Components Common Stock Preferred Stock Treasury Stock Additional Paid-in Capital Retained Earnings LO1

  11. Certificate of Stock Contributed Capital • Common Stock • Basic stock of corporation • Normally carries voting rights • Preferred Stock • Optional • Tailored to meet specific needs

  12. Maximum Allowable 1,000 Number of Shares of Stock Authorized Issued – sold or distributed Outstanding – not repurchased or retired

  13. Authorized, Issued, and Outstanding Shares Authorized shares are the maximumnumber of shares of capital stock thatcan be sold to the public. Issued shares are authorized shares of stock that have been sold. Unissued shares are authorized shares of stock that never have been sold.

  14. Outstanding sharesare issued shares that are owned by stockholders. Issued Shares Treasury sharesare issued shares that have been reacquired by the corporation. Authorized, Issued, and Outstanding Shares Outstanding Shares Unissued Shares Treasury Shares

  15. vestige ves·tige \ves-tij\ noun Etymology: Middle English, from Middle French, from Latin vestigium footstep, footprint, track, vestige (15th century) A trace, mark, or visible sign left by something (as an ancient city or a condition or practice) vanished or lost.

  16. Certificate of Stock $1.00 Par Value Par Value(pp. 523-524) • Vestigial legal concept under state law • Arbitrary amount • May also called “stated value”

  17. Some states do not require that a par value be stated in the charter. Some states do notrequire a par value to be stated in the charter. Par Value and No-par Value Stock Par Value  Market Value

  18. Certificate of Stock $1.00 Par Value 15 Additional Paid-in Capital • Amount received in excess of par when stock was issued

  19. Additional Paid-in Capital • Paid-in capital (p. 520) • Additional paid-in capital • Paid-in capital in excess of par • Premium on stock • Capital surplus (not GAAP; may be used in law)

  20. Retained Earnings/Accumulated Deficit • Accumulated net income and net losses, less dividends, since inception of corporation • Because of the concepts of historical cost and matching, bears no relation to available assets or their value

  21. Example Common Stock $ 10,000 ( $10 par value × 1,000 shares) 1,000 shares of $10 par value stock sold for $15 per share Additional Paid-In Capital $5,000 (($15 – $10) × 1,000 shares) Stock Issued for Cash Cash 15,000 Common Stock 10,000 Additional Paid-In Capital—Common 5,000 To record the issuance of 1,000 shares of $10 common stock at $15 per share. LO3

  22. Certificate of Stock Stock Issued for Noncash Consideration • Record at fair market value of consideration given or received, whichever is more readily determinable Title to land, building, etc.

  23. Certificate of Stock Treasury Stock • Another vestigial concept • Company buys back its own stock • Contra-equity account (debit balance) • Not outstanding (no stockholder rights) LO4

  24. Reasons for Repurchasing Stock • Provide for employee bonuses or benefit plans • Maintain a favorable market price (antidilution) • Improve financial ratios • Maintain control of ownership • Prevent unwanted takeover or buyout attempt

  25. Presentation of Treasury Stock Common stock, $10 par value, 1,000 shares issued, 900 outstanding$10,000 Additional paid-in capital—Common 12,000 Retained earnings 15,000 Total contributed capital and retained earnings 37,000 Less, Treasury stock, 100 shares at cost ($25 per share) 2,500 Total stockholders’ equity $34,500

  26. $100 par 7% preferred stock , Preferred Stock • Preference(s) over common stock • Can be tailored to specific needs of firm • Dividend preference may have stated dividend rate • Percentage of the stock’s par value • Per-share dollar amount LO2

  27. 2005 2006 1 2 3 2007 4 5 6 7 8 9 10 1 2 3 11 12 13 14 15 16 17 4 5 6 7 8 9 10 1 2 3 18 19 20 21 22 23 24 11 12 13 14 15 16 17 4 5 6 7 8 9 10 25 26 27 28 29 30 31 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Preferred Common Preferred Stock Features(pp. 525-526) • Cumulative • Participating • Callable (form over substance?) • Convertible

  28. Wachovia Swings to Loss, Plans to Raise Capital By KEVIN KINGSBURYApril 14, 2008 10:00 a.m. Battered by sinking credit quality and an ill-timed acquisition of a California mortgage lender, Wachovia [Corporation] plunged into the red in the first quarter and will sell more stock to shore up its capital levels. In response, the bank will raise $7 billion in fresh capital by selling common and preferred stock -- $3.5 billion of each -- and will save another $2 billion a year by cutting its dividend 41%. The common stock will be lowered at $24 a share, a 14% discount to Friday's closing price. The preferred stock will pay a 7.5% dividend and each $1,000 investment will convert into 32.0513 shares, or $31.20 a share.

  29. Xerox Declares First Common Stock Dividend in Six Years NORWALK, Conn., Nov. 19, 2007  -- Xerox Corporation's (NYSE: XRX) board of directors declared a quarterly cash dividend on Xerox common stock.

  30. Best Buy Boosts Payout, Unveils Buyback Plan JUNE 21, 2011, 1:38 P.M. ET By Matt Jarzemsky of DOW JONES NEWSWIRES NEW YORK (Dow Jones) Best Buy Co.'s (BBY) board authorized a $5 billion stock-repurchase program and a 7% dividend increase, returning cash to shareholders as the electronics retailer works to shrink its "big box" presence amid lackluster consumer demand.

  31. Dividend Requirements • Sufficient cash • Positive retained earnings (or other state law requirements)

  32. Date dividend check for Jane Doe Dept.. of Treasurer on 1 2 3 1 2 3 4 5 6 7 8 9 10 4 5 6 7 8 9 10 11 12 13 14 15 16 17 11 12 13 14 15 16 17 18 19 20 21 22 23 24 18 19 20 21 22 23 24 25 26 27 28 29 30 31 25 26 27 28 29 30 31 Payment date Declaration date Cash Dividends Paid to Record date

  33. Dividends Journal entry required to record (1)dividends declared (2) dividends paid 12/31/07 1/15/08 Reduce retained earnings Pay dividends

  34. Date dividend check for Jane Doe Dept.. of Treasurer Recording Cash Dividends Retained Earnings XXX Cash Dividend Payable XXX To record the declaration of a cash dividend. Cash Dividend Payable XXX Cash XXX To record the payment of a cash dividend.

  35. 2004 1 2 3 2005 4 5 6 7 8 9 10 11 12 13 14 15 16 17 1 2 3 2006 4 5 6 7 8 9 10 18 19 20 21 22 23 24 11 12 13 14 15 16 17 1 2 3 25 26 27 28 29 30 31 4 5 6 7 8 9 10 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 2007 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Allocation of Cash Dividends • Distribute dividends in arrears, if any, to preferred • Distribute current year’s dividends to preferred • Distribute remainder to common (or to both if preferred is participating) LO5

  36. Cash Dividends Example Stricker Company declares a $70,000 dividend in 2007 (no dividends were paid in 2005 or 2006). There are 10,000 shares of $10 par, 8% preferred stock and 40,000 shares of $5 par common stock outstanding.

  37. Cash Dividends Example Noncumulative Preferred Stock To Preferred To Common Step 1: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) $8,000 Step 2: Distribute remaining dividend to common ($70,000 – $8,000) $62,000 Total allocated $8,000 $62,000 $0.80 per share $1.55 per share

  38. Cash Dividends Example Cumulative Preferred Stock To Preferred To Common Step 1: Distribute dividends in arrears to preferred (10,000 shares × $10 par × 8% × 2 years) $16,000 Step 2: Distribute current-year dividend to preferred (10,000 shares × $10 par × 8% × 1 year) 8,000 Step 3: Distribute remainder to common ($70,000 – $24,000) $46,000 Total allocated $24,000 $46,000 $2.40 per share $1.15 per share

  39. Date Dividend check for Jane Doe I.M. Treasurer Dept.. of Treasurer Dividend Payout Ratio(p. 529) Annual Dividend Amount Annual Net Income The % of earnings paid as dividends

  40. Certificate of Stock Certificate of Stock Certificate of Stock Certificate of Stock Certificate of Stock Certificate of Stock Stock Dividends Issue of additional shares proportionately to existing stockholders • Reasons • Insufficient cash? • Market price reduction • Nontaxable to recipients LO6

  41. Certificate of Stock Certificate of Stock $3 par value Certificate of Stock Certificate of Stock $1 par value Stock Splits • Result in additional issuance of shares • Reduce par value per share • No change in Stockholders’ Equity accounts LO 7

  42. Disclose in notes Stock Splits • Not recorded in accounts • Reduce market price per share and make the stock more accessible to a wider range of investors

  43. Statement of Stockholders’ Equity Explains all reasons for the difference between beginning and ending balances of each of the accounts in the Stockholders’ Equity section of the Balance Sheet LO8

  44. Certificate of Stock

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