Chapter 11

Question 1

Shareholder’s rights

Answer 1

• Voting (in person or by proxy)
• Getting dividends
• Proportionate distributions of assets in a liquidation

Question 2

Who appoints the Board of Directors?

Answer 2

The shareholders (owners of voting shares)

Question 3

Who appoints the president?

Answer 3

Board of Directors

Question 4

What is authorized shares?

Answer 4

The maximum number of shares that can be sold to the public. This is frequently set to an unlimited amount to provide maximum flexibility to the corporation.

Question 5

What is issued shares?

Answer 5

Issued shares are authorized shares that have been sold

Question 6

What is unissued shares?

Answer 6

Unissued shares are authorized shares that never have been sold

Question 7

What 2 shares are under issued shares?

Answer 7

• Outstanding shares
• Treasury shares

Question 8

Outstanding shares

Answer 8

Issued shares that are owned by the shareholders

Question 9

Treasury shares

Answer 9

issued shares that have been reacquired by the corporation. In Canada, reacquired shares are usually canceled.

Question 10

2 primary sources of shareholder’s equity!

Answer 10

• Contributed Capital (Common and preferred shares + Contributed surplus)
• Retained Earnings

Question 11

Contributed capital

Answer 11

Amount invested by shareholders

Question 12

2 components of contributed capital

Answer 12

• Amounts initially received from the sale of shares
• Contributed surplus that reflects contributions made by shareholders in excess of the amounts credited to share capital accounts.

Question 13

Retained earnings

Answer 13

Cumulative amounts of net earnings generated since the organization of the corporation less the cumulative amount of dividends paid by the corporation since organization

Question 14

2 Types of share capital

Answer 14

• Common shares
• Preferred shares

Question 15

Common share transactions

Answer 15

• Basic voting shares
• Ranks after preferred shares
• Dividends set by Board of Directors

Question 16

Initial Sale of Shares

Answer 16

1. Initial Public Offering (IPO)
   The first time a corporation sells shares to the public
2. Seasoned new issue
   Subsequent sales of new shares to the public

Question 17

2 rules if shares are issued for non-cash assets and/or services

Answer 17

• Record assets or services received at the market value of the shares given up at the date of the transaction.
• If the market value of the shares cannot be determined, then the market value of the assets or services received should be used

Question 18

Reasons for reacquisition of a corporation’s own shares

Answer 18

• Reduce shares outstanding to increase EPS
• Have enough shares on hand to meet employee share compensation contracts
• Buy out a particular ownership interest
• Meet the needs of a potential merger
• Stop (or slow down) takeover attempts
• Reduce the number of shareholders
• Make a market in the company’s shares
• Return cash to shareholders

Question 19

Dividends on Common Shares

Answer 19

• Declared by the Board of Directors
• Not legally required
• Creates liability at declaration
• Requires sufficient retained earnings and cash

Question 20

What is stock dividends

Answer 20

Distribution of additional shares to the shareholders

• No change in total shareholder’s equity
• Retained earnings decrease
• All shareholders retain same percentage ownership

Question 21

When is stock dividend considered small?

Answer 21

Stock dividend < 20-25% –> Record at current market value per share

Question 22

When is stock dividend considered large?

Answer 22

Stock dividend > 20-25% –> Record at current average issue price per share

Question 23

What is preferred shares?

Answer 23

• NO VOTING RIGHTS
• Preference over common shares
• Has a fixed dividend rate

Question 24

Types of Preferred Shares

Answer 24

• Cumulative
• Convertible
• Callable/Redeemable
• Retractable

Question 25

Cumulative shares

Answer 25

Dividends in arrears must be paid before any profits can be distributed to common shareholders

Question 26

Convertible shares

Answer 26

The company or holder can exchange the shares for common shares at a predetermined ratio

Question 27

Callable/Redeemable shares

Answer 27

The issuing company can “call” at its option the preferred shares at specified future dates at stipulated prices

Question 28

Retractable shares

Answer 28

The holders can “put” (or sell) their shares to the company

Question 29

Dividends on Preferred Shares

Answer 29

• Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common shares.
• Cumulative Dividend Preferences: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.

If the preferred shares are non-cumulative, any dividends not declared in previous years are lost permanently.

Question 30

Additional components of SE other than contributed capital

Answer 30

Retained earnings
Accummulated Other Comprehensive Income (Loss)

Question 31

Earnings Per Share (EPS) Ratio

Answer 31

EPS = Net Earnings Available to Common Shareholders / Average Number of Shares Outstanding for the Period

Earnings per share is the most widely watched financial ratio.