GSBA 510 Lecture Deck Class 24 F24 V1

Class Information

• Course: GSBA 510 Class 24: Stockholders' Equity

• Instructor: DeFond, Chapter 10

• Institution: USC Leventhal School of Accounting, University of Southern California

• Recording Notice: Classes may be recorded via Zoom and Panopto, including any student interactions.

Class Topics

• Main Topic: Stockholders' Equity

Corporate Form of Organization

Learning Objective 1

• Definition: Identify the corporate form of organization and its principal characteristics.

Corporations

• Formation:

  • Separate legal entities.

  • Organizers apply for a charter by filing articles of incorporation.

  • Approval leads to the election of a Board of Directors and adoption of bylaws.

  • Stock is issued to shareholders in exchange for assets.

Primary Corporate Stakeholders

• Stockholders: Own the corporation and elect the board of directors.

• Board of Directors: Establish policies, declare dividends, select officers.

• Officers: Manage operations and implement policies.

• Employees: Execute management's plans and procedures.

Advantages of the Corporate Form

• Separate Legal Entity: Corporations are distinct from their owners.

• Limited Liability: Shareholders are not personally liable for company debts.

• Transferability of Ownership: Shares can easily be transferred.

• Continuity of Existence: Corporations continue regardless of changes in ownership.

• Ability to Raise Large Amounts of Capital: Primarily due to limited liability and transferability.

Disadvantages of the Corporate Form

• Organization Costs: Expenses related to forming corporations.

• Double Taxation: Corporate income is taxed, and dividends to shareholders are also taxed.

• Regulation and Supervision: Corporations face extensive regulatory requirements.

Par Value vs No-Par Value Stock

Learning Objective 2

• Par Value Stock: Historically required to prevent fraud but now often set at low values without economic significance.

• No-Par Value Stock: Permitted in many states, often assigned a stated value by the board, referred to as legal capital.

Types of Capital Stock

Learning Objective 3

• Authorized Shares: Maximum that can be issued.

• Issued Shares: Shares sold to stockholders.

• Outstanding Shares: Issued shares that remain with stockholders.

Common Stock

• Characteristics:

  • Basic type of capital stock (must have at least one).

  • Voting rights on corporate matters (elections, mergers).

  • Rights to proportional share in net income and preemptive rights.

  • Claims on residual assets in liquidation.

Preferred Stock

• Dividend Preferences: Receive dividends before common stockholders.

• Cumulative vs Non-cumulative: Cumulative shares must receive all missed dividends before common shares receive any.

• Asset Distribution Preference: Preferred stockholders have a higher claim in liquidation than common stockholders.

• Other Features: Convertible, callable, participating in special dividends.

Accounting for Stock Issuances

Learning Objective 4

• Stock Issuance Process:

  • Capital stock account increases for par value, assets received increase, and any difference is added to Paid-In Capital.

• Example: Lester Corp. issues preferred and common stock for cash.

Noncash Stock Issuances

• For Services or Assets: Treated similarly; value of stock equals value of assets or services received.

• For Convertible Bonds: Book value of bonds is used in calculation.

Stock Splits

Learning Objective 5

• Forward Stock Split: Increases outstanding shares, reduces par value; no effect on total equity.

• Example: Los Altos Inc. 2-for-1 stock split.

• Reverse Stock Split: Decreases outstanding shares to increase market price; also has no effect on total equity.

Treasury Stock

Learning Objective 6

• Definition: Acquired shares that are not retired.

• Purpose: Buybacks can serve various strategic reasons and decrease stockholder equity.

• Accounting Treatment: Cash is decreased; treasury stock account is increased (contra-equity).

Dividends

Learning Objective 7

• Definition: Distribution of assets or stock to shareholders; not mandatory but becomes a legal liability when declared.

• Cash Dividends: Most common type, require retained earnings and cash.

• Stock Dividends: Distribution of shares often used by companies lacking cash. Total equity remains unchanged.

Retained Earnings and Stockholders’ Equity Statements

Learning Objective 8

• Statement of Retained Earnings: Provides changes in retained earnings over a period, including net income and dividends.

• Statement of Stockholders’ Equity: Comprehensive analysis of all equity accounts for the period.

Return Metrics

Learning Objective 9

• Return on Common Stockholders’ Equity: Measures profitability, calculated as (Net income – Preferred stock dividends) / Average common stockholders’ equity.

• Dividend Yield and Payout Ratio: Key metrics for investors focusing on income; correlation with company growth stage.

• Example Calculation: Provided for specific case study from the classroom.