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.