Class Notes (837,186)
Canada (510,155)
Business (3,287)
BU227 (25)
Lecture

Chapter 12

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Department
Business
Course
BU227
Professor
James Moore
Semester
Fall

Description
Chapter 12The number of issued shares may differ from the number of outstanding shares if the company has bought back some treasury of its shares from shareholdersTreasuryoutstandingissued shares the excessive use of stock options as a form of compensating key executives led the executives of some companies to manipulate reported financial information in an effort to increase the share price allowing them to benefit by buying shares at a fixed price and selling them at a higher price for a profitWhen the options are exercised BCE receives 30 per common share while it could obtain a higher price if it sold the same shares in the market to other investors Clearly the exercise of employee stock options entails a cost to BCE that should be measured and reportedCanadian companies must estimate and report compensation expense associated with stock optionsEARNINGS PER SHARE RatioMeasure of the return on investment that is based on the number of shares outstanding instead of the dollar amounts reported on the statement of financial position All analysts and investors are interested in a companys earnings You have probably seen newspaper headlines announcing a companys earnings Notice that those news stories normally report earnings on a per share EPS basis The reason is simple Numbers are much easier to compare on a per share basischange in the number of common shares outstanding during the twoyear periodWhile EPS is an effective and widely used measure of profitability it can be misleading if there are significant differences in the market values of the shares being compared Two companies earning 150 per share might appear to be comparable but if shares in one company cost 10 while shares of the other cost 175 they are not comparable Obviously investors expect a large EPS number for companies with higher stock pricesA corporation may want to purchase its own shares from existing shareholders to increase the market price per share and the EPS from the reduction in the number of outstanding sharesMost Canadian companies cancel their shares when they buy them back from shareholders When shares are cancelled the appropriate share capital account is reduced by an amount that reflects the average issuance price per share If the purchase price is less than the average issuance price the difference is credited to contributed surplus For example if BCE purchased 50000 common shares in the open market at 30 per share and the average price of the previously issued common 4shares is 34 the journal entry and the transaction effects would be as follows Repurchases of shares at prices lower than the average issue price do not result in profit for the issuing company because they are capital transactions not operating transactionsAssume further that BCE subsequently purchased 50000 of its own common shares when the price per share was 40 In this case the excess of the purchase price over the issuance price is 6 per
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