ARBUS102 Lecture Notes - Initial Public Offering, Legal Personality, Treasury Stock
ARBUS 102 February 25, 2013
Chapter 11: Reporting and Interpreting Shareholders’ Equity
- A corporation is a separate legal entity.
- Disadvantage: creating a corporation can be expensive.
- Advantage: a corporation limits the legal liability of owners and provides a method of raising
money by selling shares.
- A common share is the basic voting share issued by a corporation to shareholders.
Main 4 Rights Given with Common Shares
The right to vote on major issues
A share of the corporation’s profits
A share in any assets after creditors have been paid
(not that great because they get paid last in a
The right to purchase newly issued shares
(if the company is selling more shares, common
shareholders get first dibs → if they do not get to buy
it first, interest is diluted when they own less of a
Typical Organization Structure of a Corporation
EQUITY VERSUS DEBT FINANCING
A corporation can raise funds by:
COMMON SHARE TRANSACTIONS
- Authorized shares is the maximum number of shares that can be issued, as specified in the
o Usually the number of authorized shares is “unlimited”
- Issued shares have been distributed by the corporation.
- Outstanding shares are currently held by shareholders.
o Usually issued shares and outstanding shares are the same number unless the company
is in the process of repurchasing shares
- Treasury shares are issued shares that have been reacquired by the company.
- Book value of the share is the amount of money invested when the shareholder put money into
- Market value will fluctuate to reflect how much the company is worth
- A share issuance occurs when a corporation distributes its shares in exchange for cash.
- An initial public offering (IPO) is the first issuance of a company's shares to the public.
o When you move from a private company to a public company
- The issuance of additional new sales are called seasoned new issues.
REPURCHASE OF SHARES
A corporation may repurchase its shares for various reasons:
1. To distribute excess cash to shareholders
2. To signal investors that the company believes its shares are worth acquiring
3. To get back shares so that new shares can be issued as payment for purchases of other
4. To get back shares so that new shares can be issued to employees as part of stock
5. To create a demand for the company’s shares which may stabilize or increase the share
DIVIDENDS ON COMMON SHARES
- Investors in common shares expect a return on their investment:
- A corporation does not have to pay dividends
o Technology companies (such as Apple and Blackberry) choose not to pay dividends and
try to the grow the business instead → raising the share price
- Dividend payments must be approved by the board of directors
- A corporation must have sufficient cash to pay dividends
CASH DIVIDEND DATES
- Declaration Date: the date the board of directors officially approves a cash dividend, thereby
creating a liability
o + Dividends payable (liabilities), -dividends declared (shareholder’s equity)
o dividends are not expenses; they are distributions of accumulated earnings
- Date of Record: the corporation prepares a list of current shareholders. The dividend is payable
only to those listed on the record date
- Date of Payment: On the Payment date, a cash dividend is paid to the shareholders of record
o –cash (assets), -dividends payable (liabilities)