Sources Of Capital:Owner’s Equity

Presented By:Aniket Aggarwal

Ankit ModiAnkit Jain

Anirudh Iyer

Forms of Business Organizations

• Sole Proprietorship- One Owner- No reports or registrations required- Entity and Owner are same – Legally - Can only raise capital via Bank Loans• Partnership• Limited Partnership – Different from a loan

Forms of Business Organizations

• Corporations- Charter to Operate from States- Entity and Owners are Different- Limited Liability – Owners POV

Corporation

Private/ Tightly Held Corporation

(2-50)

Public Corporation (7)

Corporations

Disadvantages Advantages

High Legal and Red Tape fees Bonds and Stocks to Raise Capital

Activities limited to Charter Liquidation of ownership

Regulated

Double Taxation : Dividends

Accounting Principles

• Proprietorship- One Capital account for owner’s equity- One Drawing account for withdrawals

• Partnership- Multiple Capital account for owner’s equity- Multiple Drawing account for withdrawals- Accounting based on partnership agreement

Ownership in a Corporation

Stock Certificate

• Represents %age ownership in a corporation.• 2 types:

Preferred• It has stated dividend, like interest payment on bonds.• It has preference over common as to the receipt of

dividend

Common• Dividend is not certain• Has voting rights and other privileges.

Preferred Stock-Types

Cumulative• Unpaid dividend gets accumulated• Which must be paid before common stock

dividend

Non-Cumulative• No such obligation

Preferred Stocks

Usually issued with a par or face value of $100

Dividend rate (analogous to coupon rate on a bond) to is mentioned on it

If corporation is liquidated holders are entitled to par value for their shares. But

they cant sue, if not paid.

Common Stocks• Claim on asset and profits after Creditors and Preferred

Stockholders• May or may not have Par value• Par Value: Face value, usually a nominal amount such as $ 1.

For common stock is a meaningless value.• Book Value: Total common shareholder’s equity as reported

on bal-sheet divided by no of shares.• Retained Earnings: Unpaid dividend or profit• Issuance Cost: legal, auditing & printing cost to Investment

Banker, which usually handles issue of stock.• Journal Entries: For a stock of Par value 1rs and issue price 7rs

Cash A/C Dr…………………….7 rs

to Common Stock at Par………………..1 rs

to Additional Paid-in Capital………..6 rs

Common Stock

Book Value8 rs

Paid-in Capital7 rs

Common stock at Par

1 rs

Addition Paid-in Capital

6 rs

Retained Earnings

1 rs

Treasury Stock• Firm’s own stock which were issued and reacquired.

• It has no Voting, Dividend or other shareholders rights.

• In Bal-Sheet it is reported as reduction in shareholders equity

• Cash Method: Method of accounting for treasury stock. Reacquisition is recorded at reacquisition cost, irrespective of par value.

Treasury Stock Dr……………..9 to Cash Cr……………………………….9

Cash Dr……………………………..10 to Treasury Stock Cr………………….9 to Additional paid in capital Cr…..1

Other Concepts

• Cumulative net income, less total dividend payed since the beginning.Retained Earnings:

• Subtracted from retained earnings• For uses like expansions or contingencies.• Just a representation, no real money

transfer

Reserves: intangible

appropriations for some purpose.

Dividends

• Paid from retained earnings. Voted by board members to be given or not.

• If voted yes , then it is recorded in the books on the same day

When DeclaredRetained earnings Dr ………….6 to Dividends payable……………..6When Paid Dividends Payable Dr………….6 to Cash ………………………………….6

Dividends

Stock Splits: each stock holder receives a multiple of the number of share previously held.• 2-for-1 Split: total no of outstanding stock will double, value of

each stock will be halved

Stock dividends: Dividend in the form of stock (either newly issued or from treasury stock)

Spin Offs: Dividend in the form of stock of some other corporation

Stock options and Warrants• Contract between two people that gives the holder the right, but not the obligation,

to buy or sell outstanding stocks at a specific price and at a specific date

• Options are purchased when it is believed that the price of a stock will go up or down (depending on the option type). For example, if a stock currently trades at $40 and you believe the price will rise to $50 next month, you would buy a call option today so that next month you can buy the stock for $40, sell it for $50, and make a profit of $10

• Issuer: Warrants are issued by a specific company, while exchange-traded options are issued by an options exchange. As a result, warrants have few standardized features, while exchange-traded options are more standardized in certain aspects such as expiration periods and the number of shares per option contract

• Dilution: Warrants cause dilution because a company is obligated to issue new stock when a warrant is exercised. Exercising a call option does not involve issuing new stock, since a call option is a derivative instrument on an existing common share of the company

The most closely watched statistic

• Earnings per share (EPS) is measurement of company’s per share performance over a period of time

Reflects the maximum potential dilution from all possible stock conversions that would have decreased EPS.

Diluted

There may be two EPS numbers for each item:

Considers onlycommon shares

outstanding

Basic

Relation between Basic and Diluted EPS

Dilution of Earnings

• Dilutive Securities: Securities whose assumed exercise or conversion results in a reduction in earnings per share.

• Antidilutive Securities: Securities whose assumed conversion or exercise results in an increase in earnings per share.

ZERO COUPON BONDS

• A company may issue bonds that pay no interest but whose face value is payable in some specific year is a zero coupon bond

• No Interest payments so zero coupon bonds sold at deep discount

• Annual amortization of discount amount is reported as interest expense by coorporation

DEBT WITH WARRANTS

• A warrant, usually attached to a bond, giving the holder the right to purchase more bonds or debt securities from the same issuer at a stated price

• The exercise price on warrants are 15-20% above current market price.

• Small firms that investors regard as being risky would not be able to attract investors to their bonds without using warrants as “ sweetener”

• Investors accept correspondingly lower interest rate on the bond when issued with warrant thus reducing interest cost of bond to issuer.

Debt with warrants

Detachable Nondetachable

• For detachable warranties, proceeds of the offerings should be allocated between debts and warrant based on their relative fair value.

• Entry for bonds with warrants

Cash 210,000Bonds Payable 200,000Bond premium 6,000Warrants Outstanding 4,000

REDEEMABLE PREFERRED STOCK

• A type of equity share that is liable to be bought back by the issuing company on a specified date or after a specified period of notice

• Company’s obligation to pay redemption price may be fully as certain as that for the redemption of bonds when they mature.

EQUITY IN NON PROFIT ORGANIZATION

Endowment

• Contributions whose principal is intact indefinitely, with earnings on that principal available to finance current operations.

Contributed Plant

• Contributed buildings, museum objects etc or funds to acquire these or similar assets.

• Difference in source of equity funds is the only difference in accounting for Profit and Non profit organizations.

Thank You