⋆.𐙚 ̊ accounting [chapter nine]: dividends

dividend

money a company gives to its stockholders (owners) as a reward for investing in the company

types of dividends

1. cash dividends

2. property dividends

3. scrip dividends

4. stock dividends

cash dividends

company pays cash to stockholders

property dividends

the company gives out assets (like equipment or investments) instead of cash 

scrip dividends 

the company promises to pay later

stock dividends

the company gives extra shares of stock instead of money

how often do companies pay cash dividends?

every three months (quarterly)

what a company needs to pay a cash dividend

before paying a dividen, a company must have:

1. retained earnings (profits from past years)

2. enough cash to pay it

3. approval from company board 

three important dividen dates

1. declaration date

2. record date

3. payment date

declaration date

the company officially says “we will pay a dividend”, recorded in journal entry

record date

the company checks who owns the stock the date, no journal entry

payment date 

the company sends out money to shareholders, recorded in journal entry

preferred stock dividen preferences

1. get paid first: get dividens before common stockholders

2. fixed dividen

3. cumulative dividens

4. extra protection: get paid first if company fails

fixed dividen preference

usually has a set percentage of par value or a specific dollar amount

cumulative dividend

if company skips dividens one year, preferred shareholders must be paid first

parts of stockholders equity

1. paid in capital

2. retained earnings

paid in capital

the money stock holders put when buying shares, can be either capital stock or additional paid in capital 

capital stock

the basic stock accounts (common or preferred) 

additional paid in capital

money paid above the stock’s par value

other comprehensive income (oci)

special adjustments that affect equity but are not part of normal income

what does oci include?

1. adjustments for pensions plans

2. gains or losses from foreign currency changes

3. some unrealized gains or losses on investments 

debt vs equity financiing

a company can raise money in two main wasy

1. debt financing

2. equity financing 

advantages of debt financing (borrowing money/bonds)

• stockholders keep full control (no new owners) 

• interest paid on debt is tax deductible 

• can increase return on stockholder’s equity if borrowed money helps earn more profits

advantage of equity financing (issuing more stock) 

• no need to repay like a loan

disadvantage to equity financing

more shareholders means ownership gets spread out

return on common stockholder’s equity

shows how well the company uses stockholder’s money to make profit

formula for return on common stockholders equity

(net income - preferred dividens)/ average common stockholder’s equity = roe

how can roe increase?

• if company earns more profit (higher return on assets)

• company uses more debt (leverage) wisely

leverage (debt to assets ratio)

shows how much of the company’s assets are financed by debt

debts to assets ratio formula

total liabilities/total assets = debt to assets ratio

what does a higher leverage mean?

more risk, but possibly higher returns as company assets are mostly financed by debt