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
Voting Rights The right to vote on major issues
Dividends A share of the corporation’s profits
Residual Claim A share in any assets after creditors have been paid
(not that great because they get paid last in a
Pre-emptive Rights 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 re