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MFIN1021 Chapter Notes - Chapter 14: Callable Bond, Cumulative Voting, Sinking Fund

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School
Boston College
Department
Finance
Course
MFIN1021
Professor
Michael Rush

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Chapter 14
Definitions:
Internally Generated Funds: cash reinvested in the firm: depreciation plus earnings not paid
out as dividends
Financial : Defecit: difference between the cash companies need and the amount generated
internally
Treasury Stock: stock that has been repurchased by the company and is held in its treasury
Issued Shares: shares that have been issued by the company
Outstanding Shares: shares that have been issued by the company and are held by investors
Authorized Share Capital: maximum number of shares that the company is permitted to issue
Par Value: value of security shown in the company’s accounts
Additional Paid-In Capital: difference between issue price and par value of stock, also called
capital surplus
Retained Earnings: cumulative value of reinvested profits
Majority Voting: voting system in which each director is voted on separately
Cumulative voting: voting system in which all votes that on shareholder is allowed to cast can
be cast for one candidate for the board of directors
Proxy contest: takeover attempt in which outsiders compete with management for
shareholder’s votes
preferred stock: stock that takes priority over common stock in regard to dividends
Net work: Book value of common stockholder equity plus preferred stocks
Floating-rate preferred: preferred stock paying dividends that vary with short-term interest rate
prime rate: benchmark interest rate charged by banks (LIBOR)
Funded Debt: debt with more than 1 year remaining to maturity
sinking fund: fund established to retire debt before maturity
callable bond: bond that may be repurchased by the issuing firm before maturity at a specified
called price
Eurobond: bond that is marketed internationally
private placement: sale of securities to a limited number of investors without a public offering
lease: long-term rental agreement
Warrant: right to buy share from a company at a stipulated price before a set date
Convertible bond: bond that the holder may exchange for a specified amount of another
security.
Rules:
1. However, corporations have limited liability. By this we mean that the promise to repay
the debt is not always kept. If the company gets into deep water, the company has the
right to default on the debt and to hand over its assets to the lenders.
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Document Summary

Internally generated funds: cash reinvested in the firm: depreciation plus earnings not paid out as dividends. Financial : defecit: difference between the cash companies need and the amount generated internally. Treasury stock: stock that has been repurchased by the company and is held in its treasury. Issued shares: shares that have been issued by the company. Outstanding shares: shares that have been issued by the company and are held by investors. Authorized share capital: maximum number of shares that the company is permitted to issue. Par value: value of security shown in the company"s accounts. Additional paid-in capital: difference between issue price and par value of stock, also called capital surplus. Majority voting: voting system in which each director is voted on separately. Cumulative voting: voting system in which all votes that on shareholder is allowed to cast can be cast for one candidate for the board of directors.

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Related Questions

2. Kilgore Auto Parts reported the following information at December 31, 2004:

Preferred stock, 10%, $10 par value, cumulative $60,000

Common stock, $2 par value 10,000

Additional paid-in capital – Common stock 30,000

Retained earnings 50,000

Total contributed capital and retained earnings 150,000

Less: Treasury stock (100 shares common stock at cost) (5,000)

Total stockholders’ equity $145,000

A) How many shares of common stock are issued?

B) How many shares of preferred stock are issued?

C) How many shares of common stock are outstanding?

D) What was the average price paid for the treasury shares when the company reaquired them?

E) What is the dividend PER SHARE that preferred shareholders are entitled to when a dividend is declared?

F) What was the average price of common shares when they were issued?

G) If a 15% stock dividend were issued, by how much would the total stockholders’ equity balance change?

Analyzing and Interpreting Equity Accounts and Comprehensive Income
Following is the shareholders’ equity section of the 2013 balance sheet for Procter & Gamble Company and its statement of shareholders’ equity.

June 30 (In millions, except per share amounts) 2013
Shareholders' Equity
Convertible Class A preferred stock, stated value $ 1 per share
(600 shares authorized) $ 1,137
Non-voting Class B preferred stock, stated value $ 1 per share
(200 shares authorized) --
Common stock, stated value $ 1 per share
(10,000 shares authorized; shares issued: 2013-4,009.2) 4,009
Additional paid-in capital 63,538
Reserve for ESOP debt retirement (1,352)
Accumulated other comprehensive income/(loss) (7,499)
Treasure stock, at cost (shares held: 2013-1,266.9) (71,966)
Retained earnings 80,197
Noncontrolling interest 645
Total shareholders' equity $ 68,709
Consolidated Statement of Shareholders' Equity



Dollars in millions;
Shares in thousands

Common
Shares
Outstanding


Common
Stock


Preferred
Stock

Additional
Paid-in
Capital

Reserve for
ESOP Debt
Retirement		 Accumulated
Other
Comprehensive
Income
(Loss)


Treasury
Stock


Retained
Earnings


Noncontrolling
Interest



Total
Balance June 30, 2012 $ 2,748,033 $ 4,008 $ 1,195 $ 63,181 $ (1,357) $ (9,333) $ (69,604) $ 75,349 $ 596 $ 64,035
Net earnings 11,312 90 11,402
Other comprehensive income 1,834 1,834
Dividends to shareholders:
Common (6,275) (6,275)
Preferred, net of tax benefits (244) (244)
Treasury purchases (84,234) (5,986) (5,986)
Employee plan issuances 70,923 1 352 3,573 3,926
Preferred stock conversions 7,605 (58) 7 51 —
ESOP debt impacts 5 55 60
Noncontrolling interest, net (2) (41) (43)
Balance June 30, 2013 $ 2,742,327 $ 4,009 $ 1,137 $ 63,538 $ (1,352) $ (7,499) $ (71,966) $ 80,197 $ 645 $ 68,709


(a) What does the term convertible (in reference to the company's Class A preferred stock) mean?

Convertible means the holder of the security has an obligation to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to surrender the security and to receive cash at any time.

Convertible means the holder of the security has an option to convert (exchange) the security into another security.

Convertible means the holder of the security has an option to sell the security at any time.



(b) How many shares of common stock did Procter & Gamble issue when convertible Class A preferred stock was converted during fiscal 2013?


Answer

thousand shares

(c) For "employee plan issuances," at what average price was the common stock issued as of year-end 2013? (Round your answer to two decimal places.)

$Answer



(d) What is the accumulated other comprehensive income account?

The accumulated other comprehensive income account reflects the cumulative profit recognized by the company less the cumulative dividends that have been paid to shareholders.

The accumulated other comprehensive income account reflects the cumulative change in net assets (defined as assets less liabilities) for transactions other than net income transactions and transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative profit on transactions with shareholders.

The accumulated other comprehensive income account reflects the cumulative amount by which the company's common stock has increased or decreased since issuance.



(e) What cash dividends did Procter & Gamble pay in 2013 for each class of stock?


Common dividends =Answer

($ millions)
Preferred dividends =Answer($ millions)

_________________ is the capital supplied by common stockholders--capital stock, paid-in capital, retained earnings, and, occasionally, certain reserves. _______________ is the difference between the stock’s par value and what stockholders paid when they bought newly issued shares. ______________ is the portion of the firm’s earnings that have been saved rather than paid out as dividends.

The __________________ shows how much of the firm’s earnings were retained in the business rather than paid out in dividends. Firms retain earnings primarily to expand the business, not to accumulate cash in a bank account. The ______________ __ reports the impact of a firm’s operating, investing, and financing activities on cash flows over an accounting period.

______________________ is a firm’s net income as reported on its income statement. Net cash flow, as opposed to accounting net income, is the sum of net income plus non-cash adjustments. ______________ is the cash flow actually available for distribution to investors after the company has made all investments in fixed assets and working capital necessary to sustain ongoing operations.