Module 9

Reporting and Analyzing Owner Financing

Stockholders Equity
Total stockholders equity is divided into two components:
1.

2.

Contributed capital - proceeds received by the issuing company from original stock issuances, net of the amounts paid to repurchase shares of the issuers stock from its investors. Earned capital - Retained earnings and accumulated other comprehensive income (AOCI).

Components of Paid-in-Capital

P&Gs Stockholders Equity

Types of Stock

There are two classes of stock:

1.
2.

Preferred Stock Common Stock Dividend preference preferred shareholders receive dividends on their shares before common shareholders do. Liquidation preference preferred shareholders receive payment in full before common shareholders in liquidation.

Preferred stock preferences:

1.

2.

Preferred Stock Privileges

1.

2.

Conversion privileges a conversion privilege allows preferred stockholders to convert their shares into common shares at a predetermined conversion ratio. Participation feature allows preferred shareholders to share ratably with common stockholders in dividends.

Fortune Brands Convertible Preferred Stock

Fortune Brands Convertible Preferred Stock

Holders of convertible preferred are entitled to $2.67 dividends per share. Each share of convertible preferred stock is entitled to 3/10 of a vote per share. Holders of convertible preferred have a preference in liquidation over common shareholders amounting to $30.50. Each share of convertible preferred is convertible into 6.601 shares of common stock. Fortune Brands has an option to redeem each share at a price of $30.50; upon redemption, the preferred shareholder will receive that cash amount and will surrender that share to the company.

P&Gs Preferred Stock

Hewitts Common Stock

Par value of $0.01 per share. Hewitt has authorized the issuance of 750 million class.

To date, Hewitts management has issued (sold) 130,390,880 shares of stock.

Hewitt has repurchased 36,163,760 shares from its shareholders. The number of outstanding shares is equal to the issued shares less treasury shares. There were 94,227,120 (130,390,880 - 36,163,760) shares outstanding at the end of 2008.

P&Gs Common Stock

Sale of Stock Illustrated

To illustrate, assume that Hewitt issues 100,000 shares of its $0.01 par value common stock at a market price of $43 cash per share:

Repurchase of Stock Illustrated

To illustrate, assume that 3,000 common shares of Hewitt previously issued for $43 are repurchased for $40:

Repurchase of Stock Illustrated

Now assume that these 3,000 shares are subsequently resold for $42 cash per share.:

Hewitts Stock Repurchase Program

Hewitts Treasury Stock Section of 2008 Balance Sheet

Ciscos Stock Purchase Program

Accounting for Stock Options

Hewitts Stock Option Program

Ciscos Stock Option Expense

Accounting for Restricted Stock

Accounting for Dividends: Cash Dividends

Hewitt declares and pays a cash dividend of $10 million:

Preferred and Common Dividends

Assume that a company has 15,000 shares of $50 par value, 8% preferred stock outstanding and 50,000 shares of $5 par value common stock outstanding. During its first three years in business, the company declares $20,000 dividends in the first year, $260,000 of dividends in the second year, and $60,000 of dividends in the third year. If the preferred stock is cumulative, the total amount of dividends paid to each class of stock in each of the three years follows:

Preferred and Common Dividends (contd)

Accounting for Dividends: Stock Dividends

Small Stock Dividends Illustrated

Assume that a company has 1 million shares of $5 par common stock outstanding. It then declares a small stock dividend of 15% of the outstanding shares when the market price of the stock is $30 per share. This small stock dividend has the following financial statement effects:

Large Stock Dividends Illustrated

To illustrate the effect of a large stock dividend, assume that the company now declares a large stock dividend of 70% of the outstanding shares when the market price of the stock is $30 per share ($5 par value). The large stock dividend will have the following effects on the balance sheet:

Stock Splits in the Form of a Stock Dividend John Deere

Hewitts Accumulated Other Comprehensive Income

Foreign Currency Translation Effects on the Balance Sheet

Equity Carve Outs

Corporate divestitures have become increasingly common as companies seek to increase shareholder value through partial or total divestiture of operating units. In general, these equity carve outs are motivated by the notion that consolidated financial statements often obscure the performance of individual business units, thus complicating their evaluation by market analysts.

Equity Carve Outs: Hewitts Sell-Off

Hewitt received $42,420,000 cash. The Cyborg business was carried on Hewitts balance sheet as an investment with a book value of $6,753,000 million (inferred from the proceeds less gain). Hewitts gain on sale equaled the sale proceeds less the book value: $42,420,000 6,753,000 = $35,667,000 gain on sale. Hewitt reports the gain on sale in its 2008 income from continuing operations. Hewitt subtracts the $35,667,000 gain from net income in its statement of cash flows to compute net cash flows from operations since the transaction generated a noncash operating gain (the $42,420,000 cash inflow is reporting under investing activities).

Equity Carve Outs: Altrias spin-off of Kraft

Equity Carve Outs: Altrias spin-off of Kraft

Equity Carve Outs: Halliburtons Split-off of KBR, Inc.

Halliburton exchanged with its shareholders 135.6 million shares of KBR common stock that it owned for 85.3 million shares of common stock of Halliburton that its shareholders owned. This exchange is treated like the purchase of treasury stock. Because the exchange was on a non-pro rata basis, Halliburton increased the carrying value of the KBR shares to their fair value on the date of exchange, resulting in an after-tax gain on this transaction of $933 million.

Symantecs Convertible Securities

Symantecs Convertible Securities

Textrons Convertible Preferred Stock