AYB200 Lecture Notes - Lecture 9: Retained Earnings, Joel Stern, Share Capital
Week 9: Equity 2
Multi choice – 1) B 2) B 3) B
Shareholder Value
- AASB 101 para. 7: Owners [of the company] are holders of instruments classified as equity. -
> Shareholders = owners
- “hae apital o the alae sheet shos the oigial alue of the shaeholdes’ stake i the
business.
- Management is accountable to the shareholders of the company.
- In corporate finance, the goal of financial management is:
- to maximize shareholder value
- Shareholder value maximization (SVM) was first proposed in 1980s by Joel Stern based on
the Modigliani-Miller theorem on firm value
- But aeful: “hae apital ≠ “haeholde Value
Advantage of SVM
- Shareholder value is less prone earnings manipulation (compared to accounting profit)
- “haeholdes pia: “afeguad of shaeholde iteests, as usiess is u to eate
value for shareholders
- Efficient use of resources
Disadvantage of SVM
- Creates inequality
- Promotes bad conduct such as excessive pay and risk-taking
- Ignores interests of other stakeholders (employees, suppliers)
- Short-termism
Accounting for Share Options
- A right (not obligation) to buy a certain number of shares by a set date at a set price
- Options may be issued for free e.g. options may be issued to employees in lieu of cash
bonuses
- Options may be sold to investors – similar to normal shares.
- Where options are not exercised by a specific date they lapse.
- AASB 2 Share-based payments
Example:
- Accounting 4 Fun Ltd issued 10,000 options on 30 June 2013 to the CEO as payment for past
services. Options were valued at $1 each.
o Each option entitles the CEO to acquire a share in the company for $3
o The options must be exercised within 12 months of issue date. After this time they
will lapse
- Required:
o Prepare the journal entries to account for:
o the issue of the options
o the exercise of the options, following which
o on 1 May 2014, when the share price is $3.00, the CEO exercises the options; or
o the options are not exercised by the CEO and lapse on 30/6/14
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Dividends
- financial benefits for the shareholders
- Ordinary dividends: declared by the directors, usually expressed as cents per share (e.g. 4c
per share)
- Final ordinary dividends: dividends declared at the end of the financial year.
- Interim dividends: dividends paid part-way through the year.
- When directors declare a dividend, the company incurs a legal debt for the dividend, if the
opa’s ostitutio gies the this poe.
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Document Summary
Multi choice 1) b 2) b 3) b. 7: owners [of the company] are holders of instruments classified as equity. Ha(cid:396)e (cid:272)apital o(cid:374) the (cid:271)ala(cid:374)(cid:272)e sheet sho(cid:449)s the o(cid:396)igi(cid:374)al (cid:448)alue of the sha(cid:396)eholde(cid:396)s" stake i(cid:374) the business. Management is accountable to the shareholders of the company. In corporate finance, the goal of financial management is: (cid:862)to maximize shareholder value(cid:863) Shareholder value maximization (svm) was first proposed in 1980s by joel stern based on the modigliani-miller theorem on firm value. But (cid:272)a(cid:396)eful: ha(cid:396)e (cid:272)apital ha(cid:396)eholde(cid:396) value. Shareholder value is less prone earnings manipulation (compared to accounting profit) (cid:862) ha(cid:396)eholde(cid:396)s p(cid:396)i(cid:373)a(cid:272)(cid:455)(cid:863): afegua(cid:396)d of sha(cid:396)eholde(cid:396) i(cid:374)te(cid:396)ests, as (cid:271)usi(cid:374)ess is (cid:396)u(cid:374) to (cid:272)(cid:396)eate value for shareholders. Promotes bad conduct such as excessive pay and risk-taking. A right (not obligation) to buy a certain number of shares by a set date at a set price. Options may be issued for free e. g. options may be issued to employees in lieu of cash bonuses.
