ACC 502 Topic 6 Week 6 Assignment

ACC 502 Topic 6 Week 6 Assignment

 

Citation Report is required

 

Analyzing Stockholders’ Equity

 

The purpose of this assignment is to analyze stockholders’ equity to recommend strategies for generating cash. Understanding a company’s position as it relates to stockholders and stockholders’ equity is important when considering options and making decisions related to the strategies that should be implemented to generate cash for the company.

The chief executive officer (CFO) of the company wants to generate cash for the organization and has tasked you to review the current stockholders’ equity position for the company and use your findings to recommend strategies for generating cash flow. The CEO has requested you summarize your findings in a memo that is addressed to the CFO, but one that could be shared with other stakeholders.

Refer to the “Annual Reports for Approved Companies” and access the Form 10-K for one of the companies. Review and study the following information related to stocks:

1. Identify and discuss the current types of stock, such as common or preferred stock, currently issued, and outstanding. Include a narrative description along with the values and number of shares found on the balance sheet.
2. Identify the presence of treasury stock and its impact on overall stockholders’ equity. If the company does not have treasury stock, indicate the absence of treasury stock and provide some discussion as to why the company may not have purchased back any of its originally issued stock.
3. Review the notes to the financial statements to determine if the company has any convertible bonds and summarize the characteristics of those bonds. If there are no convertible bonds in the notes, discuss why a company may want to consider convertible bonds in the future.
4. Discuss the pros and cons of issuing new stock, reissuing treasury stock (if applicable), and issuing convertible bonds.
5. In addition, include your recommendations on how the company could generate cash from issuing new common stock, preferred stock, convertible bonds or reissuing treasury stock. Support your recommendations with examples that show the impact on cash.

 

General Requirements:

 

Using the five items above as a guide, summarize your findings and recommendations for the CFO.

 

Submit the Word memo document to the drop box with the naming convention LastnameFirstinitial.T6memo.

While APA style is not required for the body of this assignment, solid academic writing is expected, and documentation of sources should be presented using APA formatting guidelines, which can be found in the APA Style Guide, located in the Student Success Center.

This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.

You are required to submit this assignment to LopesWrite. A link to the LopesWrite technical support articles is located in Class Resources if you need assistance.

 

Topic 6 Week 6 Resources

 

Corporate Financial Reporting and Analysis: A Global Perspective

Young, S. D., Cohen, J., & Bens, D. A. (2013). Corporate financial reporting and analysis: A global perspective (4th ed.). Wiley. ISBN-13: 9781119494577. Retrieved from: https://bibliu.com/app/#/view/books/9781118558737/pdf2htmlex/index.html#page_1

(Young, et al, 2013)

Read Chapter 16 in Corporate Financial Reporting and Analysis: A Global Perspective.

 

Topic 6 – Chapters 6, 11, and 13

Chapter 16: Accounting for Shareholders’ Equity

In this chapter, we will look at all things equity—meaning stock issuance, dividends, stock repurchases, stock splits and convertible securities. This section tells a user all about what types of stock the company offers, whether there are dividends or not, if the company decided to buy back stocks and whether any of these stocks are ‘convertible’ in nature.

There are two main sections to Shareholder’s Equity:

1. Contributed Capital (Paid-in or Share Capital)
   1. Contributed Capital = Common Stock + Capital Surplus – Treasury Stock
      1. Common Stock = Par value of issued shares (usually at $1.00/share)
      2. Capital Surplus = Additional Paid in Capital above the par value

• Treasury Stock = Stock that was sold to investors, but the company has ‘bought back’ and not yet reissued or cancelled.

2. Earned Capital
   1. Earned Capital = Reinvested Earnings + Accumulated Other Comprehensive Loss
      1. Reinvested Earnings = Retained Earnings
      2. Accumulated Other Comprehensive Loss = gains and losses that are not yet represented on an income statement.

CONTRIBUTED CAPITAL DISCUSSION

Shareholder’s Equity is the ‘investment made in the firm by its shareholders’. In other words, it is the investment of stock purchased by investors/consumers. It is also known as ‘book value’. This is not the same as ‘market value’, which is the price someone will pay for the stock. We can create ratios to compare book value to market value of not only our stock, but our competitors. A company with a low ratio is considered to be a good bargain and perhaps outperform market averages. Conversely, high market price to book value tends to be stocks that will underperform as they are less than the market benchmarks.

Stock:

There are two different types of Stock:

1. Common Stock
2. Preferred Stock: Note that while this is one ‘type’ a company can have several different classifications of preferred stock they offer.

Here is a quick image of the differences between preferred and common stock.

 

Here is a simple illustration of the types of shares a company might have:

 

 

 

Here are some additional terms you will need to understand:

1. Authorized: Maximum number of shares of any ‘given class’.
2. Issued: Shares that have been sold/distributed
3. Outstanding Shares: Total number of shares owned by shareholders on any particular date
4. Par Value = Nominal or stated value per share of stock. Note, that while this appears on your stock certificates, it has NO bearing to the worth of the shares.
5. Additional Paid-In Capital (APIC): The difference between the price paid by investors when shares were issued and par value.
6. Share Repurchases = Buy Back of Shares by the Company = Treasury Stock
   1. Controls dilution of stock
   2. Adjust capital structure
   3. Changes balance of ownership
   4. US GAAP and IFRS have slightly different recording of stock repurchases
   5. You need to track the repurchase and ‘resale’ of any Treasury stock to calculate APIC

EARNED CAPITAL DISCUSSION

Earned Capital is the cumulative (life to present) profit of a company

1. Retained Earnings

Beginning Retained Earnings

+/- Net Income (Loss)

-Dividends

= Ending Retained Earnings

2. Dividends: A payment which is a cash outflow, a share of profits and retained earnings that is paid by a company to its shareholders. It is often dependent on management as to the amount and method of a dividend:
   1. Cash Dividends
   2. Stock Dividends
3. It is important to understand if a company has a higher or lower dividend policy for stock:

Annual Dividends Per Share/Price per share = a dividend yield

Yearly Dividend per Share/Earnings per share = dividend payout ratio.

The higher the ratio the greater the risk that a downturn in profits might force a company to cut its dividend (p.396).

4. Three dates to remember:
   1. Declaration Date (records the obligation)
   2. Record Date (no journal entry)
   3. Payment Date (payment of the dividend)
5. Stock Dividends & Stock Splits
   1. Stock Dividend = reduction in retained earnings and an increase in contributed capital.
      1. Provides for a company to distribute based on the percent of stock dividend against the share price.
      2. Never reduces assets: affects retained earnings, additional paid in capital, and common stock
   2. Stock Split = Number of shares held by stockholder is split based on 2-for-1 or 3-for-1.
      1. In a 2-for-1 stock split, for every share held by a stockholder, the shares are doubled. But the value per share decreases. There is essentially no change in amount of $$, but the total number of shares increases.
      2. Stock Splits can be reversed
   3. Accumulated other comprehensive Income:
      1. Unrealized gains and losses on available-for-sale securities
      2. Changes in fair value for certain derivative instruments
      3. Foreign currency translation adjustments
   4. Convertible Bonds
      1. Bonds that can convert to shares of common stock
      2. IFRS: Split accounting used
      3. US GAAP: Single unit liability
   5. Statement of Shareholders’ Equity

 

 

 

DELIVERABLES:

 

Weekly Discussion Posts:

 

Don’t forget that you have two discussions this week to participate in. The first discussion is to select one of the companies from our approved list and analyze two line items on the balance sheet under the ‘Equity’ Section. Don’t include any Liabilities even if they are grouped together with the Equities. While you can provide your opinion as to whether you would purchase company stock, be sure to back that up with support such as EPS, or another ratio.

In your second discussion, we focus on company stock, specifically when a company chooses to buy back its stock. Again, review your posts to ensure you have reasonable examples to support your position.

 

Assignment:

• Using one of the approved companies for this assignment, you will analyze a SEC Form 10-K and address each of the 5 requirements noted.
• Be sure that you provide sufficient information within your memorandum so that the CEO and other stakeholders can understand.
• Be sure that you are complete in your discussion, use appropriate citations, AND a reference page at the end of the memorandum.
• Review your work before you submit it to catch any missing words, misspellings, or other grammatical errors that could deter in reading.
• Include an Introduction (what are you going to summarize in the memo) and a Conclusion (summary of what you covered in the memo).

 

Please follow each step of the assignment and complete thoroughly. Use an appropriate template and remember I can only assess what you write! Keep it to the concept of the memoranudm but be sure it is complete!

 

 

 

 

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