Shareholders' Equity Notes

Shareholders' Equity

Mid-Term Exam #3

• Date: May 13 (Tue)
• Duration: 75 minutes in class
• Format: Closed book and closed notes
• Scope: Sessions 17 (working capital analysis) to 28 (Introduction to FSA)
• Questions:
  • 5 long questions:
    • Working capital analysis
    • PP&E
    • Intangibles
    • Investments (MS)
    • Shareholders' Equity (SE)
  • Miscellaneous short questions: Any topic from session 17 to 28
• Practice questions will be posted on Canvas.
• Submit ADS request ASAP.
• All make-up exams must be completed by May 16.
• Important: There is NO final exam.

Today's Agenda

• Contributed Capital
  • Number of shares
  • Stock repurchase
• Stock splits

Recap: Number of Shares

• Shares Authorized: The upper limit on the number of shares the corporation can issue.

  • Established in the articles of incorporation.

• Shares Issued: Actual number of shares that have been sold to shareholders.

• Shares Outstanding: The number of shares issued less the number of shares repurchased as treasury stock.

• The relationship between shares:

  • Shares Authorized = Shares Issued + Shares Unissued
  • Shares Issued = Shares Outstanding + Treasury Shares

Recap: Apple’s Footnote 10 Stock Repurchases (Stock Buybacks)

• Companies buy back their own common stock.
• Options:
  • Retire the shares.
  • Keep them as treasury stocks (contra-SE account).

Apple's Balance Sheet: SE

• Shareholders' equity:
  • Common stock and additional paid-in capital, $0.00001 par value: 50,400,000 shares authorized; 15,116,786 and 15,550,061 shares issued and outstanding, respectively
  • Accumulated deficit
  • Accumulated other comprehensive loss

Apple’s Balance Sheet: SE - Questions

• Did Apple repurchase its own common stock during fiscal year 2024?
  • Yes; determined by observing the decrease in the number of shares outstanding.
• Did Apple keep the shares repurchased as treasury stock or did Apple retire the shares?
  • Retired shares; indicated by no increase in the number of treasury stock.

Apple's Statement of Shareholders' Equity

• Summary of events changing SE
  • Total shareholders' equity, beginning balances
  • (1) Contributed capital
    • Beginning balances
    • Common stock issued
    • Common stock withheld related to net share settlement of equity awards
    • Share-based compensation
    • Ending balances
  • (2) Earned capital
    • Beginning balances
    • Net income
    • Dividends and dividend equivalents declared
    • Common stock withheld related to net share settlement of equity awards
    • Common stock repurchased
    • Ending balances
  • Accumulated other comprehensive income/(loss):
    • Beginning balances
    • Other comprehensive income/(loss)
    • Ending balances
  • Total shareholders' equity, ending balances

Apple's Statement of Cash Flow

• Cash, cash equivalents, and restricted cash and cash equivalents, beginning balances
• Operating activities:
  • Net income
  • Adjustments to reconcile net income to cash generated by operating activities:
    • Depreciation and amortization
    • Share-based compensation expense
    • Other
  • Changes in operating assets and liabilities:
    • Accounts receivable, net
    • Vendor non-trade receivables
    • Inventories
    • Other current and non-current assets
    • Accounts payable
    • Other current and non-current liabilities
  • Cash generated by operating activities
• Investing activities:
  • Purchases of marketable securities
  • Proceeds from maturities of marketable securities
  • Proceeds from sales of marketable securities
  • Payments for acquisition of property, plant and equipment
  • Other

Financing activities:

• Payments for taxes related to net share settlement of equity awards
• Payments for dividends and dividend equivalents
• Repurchases of common stock
• Proceeds from issuance of term debt, net
• Repayments of term debt
• Proceeds from/(Repayments of) commercial paper, net
• Other
• Cash used in financing activities

Number of Companies Buying Back Stock

• Includes a graph illustrating the number of companies buying back stock and the utilization rate.

Why Do Companies Buy Their Stock Back?

• To increase stock price if management feels the stock is undervalued.
  • Stock price is closely linked to executive compensation.
• To increase earnings per share (EPS).
• It’s a tax-efficient way to return capital to investors.
  • Tax is only applicable on the actual sale of shares and receiving dividends.

Berkshire Hathaway: Stock Repurchase Program in 2011

• Founded in 1889
• Based in Omaha, Nebraska
• CEO: Warren Buffett
• Conglomerate: Insurance and reinsurance, utilities, retail, railroad, etc.

Berkshire Hathaway Inc. News Release - September 26, 2011

• Berkshire Hathaway Authorizes Repurchase Program
• Berkshire Hathaway to repurchase Class A and Class B shares of Berkshire at prices no higher than a 10% premium over the then-current book value of the shares.
• Repurchases will enhance the per-share intrinsic value of Berkshire shares, benefiting shareholders who retain their interest.
• Berkshire plans to use cash on hand to fund repurchases and repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion.

Market Reaction to the Announcement (Sep. 26, 2011)

• S&P 500 -8.98%
• Dow Jones -5.17%
• BRK.B -0.71%

BRK-A: Dec. 12, 2012

• Illustrates stock performance relative to Dow Jones Industrial Average, S&P 500, and DOW.

Stock Splits

• Increase the number of shares outstanding => Lower price per share
• E.g., 2-for-1 split
  • Number of shares is doubled (x2)
  • Per share amount (e.g., price per share, EPS) is halved (÷2)
• Example:
  • 400 Pie, 4 shares at $100/share
  • 2-for-1 Split: 400 Pie, 8 shares at $50/share

Stock Split Types

• True Split
  • Adjust the following numbers proportionately:
    • Number of shares, including the no. shares authorized, issued, and outstanding.
    • All per share amount, including EPS, dividend per share, stock price per share, par value per share
• Split effected in the form of a stock dividend
  • Same as true split, except no change in par value per share (state regulation)

Berkshire Hathaway Class A (BRK.A)

• The most expensive stock (with the highest share price).
• Never had a stock split.
• Berkshire Hathaway Class B (BRK.B)
  • It used to be the second most expensive stock until 2010 – had a 50-for-1 split.

BRK.B (Split-adjusted: 50-for-1)

• Why do a stock split?
  • Increase shareholder base (more affordable to small investors)
  • Increase stock liquidity
  • Signal management’s expectation on future growth

Exercise: Apple’s 2020 stock split

• What was the ratio of the split? How can you tell?
  • 4-for-1
• Which numbers on the I/S, B/S, and SSE are affected by the stock split?
  • I/S: EPS, shares used in computing EPS
  • B/S: shares authorized, issued, outstanding
  • SSE: dividend per share
• Compare “common stock and APIC” and “Total shareholders’ equity” for FY 2019 reported on 2020 10K and 2019 10k, are they different?
  • They are the same!