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• STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL • Corporations • Advantages of Incorporation • Disadvantages of Incorporation • Publicly Owned Corporations Face Different Rules • Formation of a Corporation • Rights of Stockholders 1

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Page 1: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

• STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL• Corporations• Advantages of Incorporation• Disadvantages of Incorporation• Publicly Owned Corporations Face Different

Rules• Formation of a Corporation• Rights of Stockholders

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Page 2: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

• Functions of the Board of Directors• Corporate Organization Chart• Paid-In Capital of a Corporation• Sources of Paid-In Capital• Authorization and Issuance of Capital Stock• Stockholders’ Equity• Classes of Stockholders• Issuance of Par Value Stock

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Page 3: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

• Preferred Stock• Nonparticipating Preferred Stock• Cumulative Preferred Stock• Convertible Preferred Stock• Stock Issued for Assets Other Than Cash

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Page 4: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

MARKET VALUATION

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Page 5: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

A corporation is authorized to issue 10,000 shares of preferred stock, $100 par, and

100,000 shares of common stock, $20 par.

Issuing StockIssuing StockIssuing StockIssuing Stock

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Issuing StockIssuing StockIssuing StockIssuing Stock

On April 1, one-half of each class of authorized stock is issued at par for cash.

On April 1, one-half of each class of authorized stock is issued at par for cash.

Apr. 1 Cash 1,500000 00

Issued preferred stock and

common stock at par.

Preferred Stock500 000 00

Common Stock1,000000 00

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Issuing StockIssuing StockIssuing StockIssuing Stock

Common Stock and Preferred Stock accounts are controlling accounts. A record of each

stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.

Common Stock and Preferred Stock accounts are controlling accounts. A record of each

stockholders’ name, address, and number of shares is kept in a stockholders’ subsidiary ledger.

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Page 8: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium

On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

On March 15, Caldwell Company issues 2,000 shares of $50 par preferred stock for cash at $55.

Mar. 15 Cash 110 000 00

Issued 2,000 shares of $50 par

preferred stock at $55.

Preferred Stock100 000 00

Paid-in Capital in Excess of Par--

Preferred Stock10 000 00

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When stock is issued for more than its par, the stock has sold at a

premium. It has sold at a discount if issued for less than its par.

When stock is issued for more than its par, the stock has sold at a

premium. It has sold at a discount if issued for less than its par.

The $10,000 excess is recorded in a separate account because some states do

not consider this to be part of legal capital and may be used for dividends.

The $10,000 excess is recorded in a separate account because some states do

not consider this to be part of legal capital and may be used for dividends.

Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium

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Page 10: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation

issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.

On Nov. 12, a corporation acquired land for which the fair market value cannot be determined. The corporation

issued 10,000 shares of $10 par common that has a current market value of $12 in exchange for the land.

Nov.12 Land 120 000 00

Issued $10 par common stock

valued at $12 per share, for

land.

Common Stock100 000 00

Paid-in Capital in Excess of Par20 000 00

Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium

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Stock issued for assets other than cash should be recorded at the fair market value of the asset or fair market value of the stock, whichever can be

more clearly determined.

Issuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a PremiumIssuing Stock at a Premium

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Page 12: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

• Investopedia explains; No-par value stock prices are determined by what investors are willing to pay for them in the market.

• Companies find it beneficial to issue no-par value stock as they have flexibility in setting higher prices for future public offerings and have less liability to shareholders in the case that their stock falls dramatically.

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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.

On February 23, a corporation issues 10,000 shares of no-par common stock at $40 a share.

Feb. 23 Cash 400 000 00

Issued 10,000 shares of no-par

common stock at $40.

Common Stock400 000 00

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Page 14: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

Later, on March 9, the corporation issues 1,000 additional shares at $36.

Later, on March 9, the corporation issues 1,000 additional shares at $36.

Mar. 9 Cash 36 000 00

Issued 1,000 shares of no-par

common stock at $36.

Common Stock36 000 00

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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

Some states require that the entire proceeds from the sale of no-par stock be treated as legal capital.

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Issuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-ParIssuing Stock at No-Par

Also, no-par stock may be assigned a stated value per share. The stated value is

recorded similar to a par value.

Also, no-par stock may be assigned a stated value per share. The stated value is

recorded similar to a par value.

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Page 17: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Issuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated ValueIssuing Stock with a Stated Value

On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.

On March 30, issued 1,000 shares of no-par common stock at $40; stated value, $25.

Mar. 30 Cash 40 000 00

Issued 1,000 shares of no-par common stock at $36; stated value, $25.

Common Stock25 000 00

Paid-in Capital in Excess of

Stated Value15 000 00

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Page 18: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting by the issuer.

Accounting by the issuer.

Accounting by the investor.

Accounting by the investor.

Common stock is carried at original issue

price.

Common stock is carried at original issue

price.

Investments in marketable securities are carried at market

value.

Investments in marketable securities are carried at market

value.

Market Value

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Page 19: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Market Price of Preferred Stock

Factors affecting market price of preferred stock:

Dividend rate Risk Level of interest rates

Factors affecting market price of preferred stock:

Dividend rate Risk Level of interest rates

The return based on the market value is called the “dividend

yield.”

The return based on the market value is called the “dividend

yield.”

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Page 20: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Factors affecting market price of common stock:

Investors’ expectations of future profitability.

Risk that this level of profitability will not be achieved.

Factors affecting market price of common stock:

Investors’ expectations of future profitability.

Risk that this level of profitability will not be achieved.

Changes in market value have no impact on the

books of the issuer.

Changes in market value have no impact on the

books of the issuer.

Market Price of Common Stock

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No voting or

dividend rights

Contra equity

account

When stock is reacquired, the corporation records the treasury stock at cost.

When stock is reacquired, the corporation records the treasury stock at cost.

Treasury shares are

issued shares that have been reacquired

by the corporation.

Treasury shares are

issued shares that have been reacquired

by the corporation.

Treasury Stock

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Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions

Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is

referred to as treasury stock.

Occasionally, a corporation buys back its own stock for the purpose of later reissuing it. This stock is

referred to as treasury stock.

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Page 23: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Treasury stock is stock that:1. has been issued as fully paid.2. has been reacquired by the corporation.3. has not been canceled or reissued.

Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions

A commonly used method of accounting for treasury stock is the cost method.

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Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions

Cost Method

On January 5, a firm purchased 1,000 shares of treasury stock (common stock,

$25 par) at $45 per share.

On January 5, a firm purchased 1,000 shares of treasury stock (common stock,

$25 par) at $45 per share.

Jan. 5 Treasury Stock 45 000 00

Purchased 1,000 shares of

treasury stock at $45.

Cash 45 000 00

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Page 25: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

On June 2, sold 200 shares of treasury stock at $60 per share.

On June 2, sold 200 shares of treasury stock at $60 per share.

June 2 Cash 12 000 00

Sold 200 shares of treasury

stock at $60.

Treasury Stock9 000 00

Paid-in Capital from sale of

Treasury Stock3 000 00

Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions

Cost Method

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Page 26: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

On September 3, sold 200 shares of treasury stock at $40 per share.

On September 3, sold 200 shares of treasury stock at $40 per share.

Sep. 3 Cash 8 000 00

Paid-in Capital from Sale of

Treasury Stock 1 000 00

Sold 200 shares of treasury

stock at $60.

Treasury Stock9 000 00

Treasury Stock TransactionsTreasury Stock TransactionsTreasury Stock TransactionsTreasury Stock Transactions

Cost Method

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Page 27: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Stock SplitsStock SplitsStock SplitsStock Splits

A corporation sometimes reduces the par or stated value of their common stock and

issues a proportionate number of additional shares. This is called a stock split.

A corporation sometimes reduces the par or stated value of their common stock and

issues a proportionate number of additional shares. This is called a stock split.

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Page 28: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Stock SplitsStock SplitsStock SplitsStock Splits

BEFORE BEFORE STOCK SPLITSTOCK SPLIT

4 shares, $100 par

$400 total par value

20 shares, $20 par

AFTER 5-1 AFTER 5-1 STOCK SPLITSTOCK SPLIT

$400 total par value

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Page 29: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Stock SplitsStock SplitsStock SplitsStock Splits

A stock split does not change the balance of any corporation accounts. However, it

can make the stock more attractive to investors by reducing the price of a

share,

A stock split does not change the balance of any corporation accounts. However, it

can make the stock more attractive to investors by reducing the price of a

share,

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Page 30: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Cash DividendsAccounting for Cash Dividends Dividends are distributions of

retained earnings to stockholders.

Dividends may be paid in cash, stock, or property.

Dividends, even on cumulative preferred stock, are never required, but once declared become a legal liability of the corporation.

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Page 31: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Corporations generally declare and pay cash dividends on shares outstanding when three conditions exist:

1. Sufficient retained earnings

Accounting for Cash DividendsAccounting for Cash Dividends

2. Sufficient cash3. Formal action by the board of

directorsRetained Earnings

50,000

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Page 32: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Cash DividendsAccounting for Cash Dividends

There are three important dates relating

the dividends.

There are three important dates relating

the dividends.

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Accounting for Cash DividendsAccounting for Cash Dividends

First is the date of declaration. Assume that on December 1, Hiber Corporation declares a

$42,500 dividend.

First is the date of declaration. Assume that on December 1, Hiber Corporation declares a

$42,500 dividend.

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Dec. 1 Cash Dividends 42 500 00

Declared cash dividend.

Cash Dividend Payable42 500 00

Date of DeclarationDate of Declaration

Accounting for Cash DividendsAccounting for Cash Dividends

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The second important date is the date of record. For Hiber

Corporation this would be December 11.

The second important date is the date of record. For Hiber

Corporation this would be December 11.

Accounting for Cash DividendsAccounting for Cash Dividends

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Accounting for Cash DividendsAccounting for Cash Dividends

On this date, ownership of shares determines who receives the

dividend. No entry is required.

On this date, ownership of shares determines who receives the

dividend. No entry is required.

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The third important date is the date of payment. On January 2, Hiber

issues dividend checks.

The third important date is the date of payment. On January 2, Hiber

issues dividend checks.

Accounting for Cash DividendsAccounting for Cash Dividends

2

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Page 38: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Cash DividendsAccounting for Cash Dividends

Jan. 2 Cash Dividends Payable 42 500 00

Paid cash dividends.

Cash 42 500 00

Date of PaymentDate of Payment

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Page 39: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Stock DividendsAccounting for Stock Dividends

A distribution of dividends to stockholders in the form of the firm’s own shares is called a

stock dividend.

A distribution of dividends to stockholders in the form of the firm’s own shares is called a

stock dividend.

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Page 40: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Stock DividendsAccounting for Stock Dividends

Stock dividends transfer pro data shares of stock to stockholders. Assume

Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,

2,000,000 shares issued.

Stock dividends transfer pro data shares of stock to stockholders. Assume

Hendrix Corporation issues a 5% stock dividend on common stock, $20 par,

2,000,000 shares issued.

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Page 41: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Accounting for Stock DividendsAccounting for Stock Dividends

Dec. 15 Stock Dividends 3,100 000 00

Declared stock dividend.

Hendrix Corporation, December 15 (before dividend)Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000

Stock Dividends Distributable2,000000 00

Paid-in Capital in Excess of

Par—Common Stock1,100000 00

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Accounting for Stock DividendsAccounting for Stock Dividends

Jan. 10 Stock Dividends Distributable 2,000 000 00

Issued stocks for the stock

dividend.

Common Stock2,000000 00

On January 10, Hendix Corporation issues the stock. This action increases the number

of shares outstanding by 100,000.

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Accounting for Stock DividendsAccounting for Stock DividendsHendrix Corporation, December 15 (before dividend)

Common Stock, $20 par $40,000,000Paid-in Capital in Excess of Par--Common Stock 9,000,000Retained Earnings 26,600,000

$75,600,000

Hendrix Corporation, January 10 (after dividend)

Common Stock, $20 par $42,000,000Paid-in Capital in Excess of Par--Common Stock 10,100,000Retained Earnings 23,500,000

$75,600,000

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There are two ways to report stockholders’ equity in the balance sheet. In Next Slide, each class of stock is listed first, followed by its

related paid-in capital accounts.

There are two ways to report stockholders’ equity in the balance sheet. In Next Slide, each class of stock is listed first, followed by its

related paid-in capital accounts.

Reporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ EquityReporting Stockholders’ Equity

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Page 45: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Paid-in capital:

Preferred 10% stock, $50 par,

cumulative (2,000 shares

authorized and issued) $100,000

Excess of issue price over par 10,000 $ 110,000

Common stock, $20 par

(50,000 shares authorized, 45,000

issued) $900,000

Excess of issue price over par 190,000 1,090,000

From sale of treasury stock 2,000

Total paid-in capital $1,202,000

Retained earnings 350,000

Total $1,552,000

Deduct treasury stock (600 shares at cost) 27,000

Total stockholders’ equity $1,525,000

Stockholders’ Equity

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Next Slide shows the second method. Note that the stock accounts are listed

first. The other paid-in capital accounts are listed as a single item described as

Additional paid-in capital.

Next Slide shows the second method. Note that the stock accounts are listed

first. The other paid-in capital accounts are listed as a single item described as

Additional paid-in capital.

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Page 47: STOCKHOLDERS’ EQUITY: PAID-IN CAPITAL Corporations Advantages of Incorporation Disadvantages of Incorporation Publicly Owned Corporations Face Different

Contributed capital:

Preferred 10% stock, cumulative

$50 par (2,000 shares authorized

and issued) $100,000

Common stock, $20 par

(50,000 shares authorized, 45,000

issued) 900,000

Additional paid-in capital 202,000

Total contributed capital $1,202,000

Retained earnings 350,000

Total $1,552,000

Deduct treasury stock (600 shares at cost) 27,000

Total stockholders’ equity $1,525,000

Stockholders’ Equity

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Financial Analysis and Financial Analysis and InterpretationInterpretation

Financial Analysis and Financial Analysis and InterpretationInterpretation

Dividend YieldDividend YieldDividend YieldDividend Yield

2004 2003Dividends per share of common $ 0.80 $ 0.60Market price per share of common $20.50 $13.50

Dividends per Share of Common Stock

Market Price per Share of Common StockDividend YieldDividend YieldDividend YieldDividend Yield

$.60

$13.50Dividend Yield, 2003Dividend Yield, 2003Dividend Yield, 2003Dividend Yield, 2003 = 4.4%

Dividend Yield, 2004Dividend Yield, 2004Dividend Yield, 2004Dividend Yield, 2004$.80

$20.50= 3.9%

Use: To indicate the rate of return to common stockholders in terms of dividends

Use: To indicate the rate of return to common stockholders in terms of dividends

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End of Chapter 11

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