11. There are two types of dividends that a corporation may declare. What are th
ID: 2501021 • Letter: 1
Question
11. There are two types of dividends that a corporation may declare. What are they?
12. There are three dividend dates for dividends. Name each date and describe what happens.
13. On a small stock dividend declaration, should we debit Stock Dividends for the par value of the shares, or the market value of the shares to be distributed?
14. Does a stock dividend have any effect on the assets or liabilities of the corporation?
15. What is treasury stock? Why would a corporation purchase its own stock?
16. The Boeing Company purchases its own shares for $100, and later sells those shares for $125 per share. Would the effect of this transaction be considered additional net income for the Boeing Company?
17. What is a prior period adjustment?
18. Does a stock split change any balance in the ledger? If not, why would a corporation execute a split?
19. What is the basic formula to calculate earnings per share (EPS), assuming no preferred stock?
20. If a corporation has preferred stock outstanding, what is the formula for EPS?
21. A corporation is required to publish its EPS. On which statement will the EPS be found?
Explanation / Answer
11. There are two main types of dividends: Cash dividend and Stock dividend
12. Three dividend dates for dividends are:
Declaration Date
The declaration date is the date that the dividend is announced by the Board of Directors. The declaration statement includes the size of the dividend, the date of record and the payment date (see below). Once the dividend has been declared, the company has a legal responsibility to pay it.
Ex-Dividend Date (or Ex-Date)
After the company sets the date of record, the ex-dividend date is set by either the stock exchange or the National Association of Securities Dealers. If an investor purchases a stock on or after its ex-dividend date, he or she will not receive the declared cash dividend; instead, the seller of the stock will be entitled to that dividend. Investors who purchase the stock before the ex-dividend date will receive the dividend.
Payment Date (Payable Date)
The payment date is the scheduled date on which a declared dividend will be paid. Only shareholders who owned the stock before the ex-dividend date are entitled to the dividend.
13. On a small stock dividend declaration we should debit Stock Dividends for the market value of the shares to be distributed
14. A stock dividend has no effect on assets or liabilities of a corporaton, because cash is not distributed and new debt is not assumed. The only effect is on the stockholder's equity portion of the balance sheet.
15. Treasury stock is a corporation's previously issued shares of stock which have been repurchased from the stockholders and the corporation has not retired the repurchased shares. The number of shares of treasury stock (or treasury shares) is the difference between the number of shares issued and the number of shares outstanding.
The cost of the treasury stock purchased with cash will reduce the corporation's cash and the amount of its total stockholders' equity.
The shares of treasury stock will not receive dividends, will not have voting rights, and cannot result in an income statement gain or loss. The shares of treasury stock can be sold, retired, or could continue to be held as treasury stock.
There are many reasons of a corporation buying its own shares:
Tax efficient way to return investor's money: Healthy companies make profits and they must find an efficient way to give the profits to the shareholders if they they don't have a good way to use them. For instance, companies such as Apple have billions in their treasury sitting and earning 2% in interest. There are two main ways to return the money. 1) Dividends. 2) Buy back shares. Many companies try to keep dividends at a constant rate so as to not hit their shareholders with an unexpected tax event. When you get a dividend you have immediately pay a tax for that in that year.
Signal to the market that the board thinks the company is strong. When a company is buying back shares, it sends a message to the market. Since the company board knows the best about the company, the markets often think that the company is getting healthier.
Compensate for stock options & bonuses. Companies give out stocks to their employees in the form of options & grants. This increases the number of outstanding shares. Many companies want to keep their outstanding shares stable. So, they compensate from the issue of new shares by buying back some of the old shares from public.
Push up the stock price. The stock repurchase reduces the float (number of stocks held by the public) thereby causing a scarcity of the company's shares in the market.
Support the price. When a company is pummeled by the market, key institutional shareholders would press the company to "support a price". This is because the poor performance of the company would reflect bad on the institutions (portfolio managers, pension funds) when they send out their periodic statements to their investors.
16. No, this transactional difference would not be considered additional net income for the Boeing Company
17. Prior period adjustment is the correction of an error in the financial statements of a prior period. An error in a financial statement may be caused by:
18. No, it just changes the authorized share capital.
Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices.
When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.
Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices.
People often confuse bonus shares with stock split. Distribution of bonus shares only changes its issued share capital whereas stock split splits the company's authorized share capital.
19. EPS = Earnings attributable to shareholders/ no.of outstanding shares
20. The formula is same, we just have to deduct the preference dividend from earnings before calculating EPS for common stockholders.
21. Income statement.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.