Question

Internet Case 12.7 – Analyzing Stockholders’ Equity and EPS

(MUST POST FIRST) Initial Post – As an employee, write an internal memo to your manager addressing the following:

Using the Internet, locate the most recent annual report of a company of your choosing and write an initial post by responding to the following:

Do not research the company listed in the text.

For the most recent day indicated, what were the highest and lowest prices at which the company’s common stock sold?

Find the company’s balance sheet and determine the following: the number of outstanding shares of common stock and the average price at which those shares were originally sold.

What is the relationship between the current market price and the amount you have calculated in part b as the average price at which the stock originally sold?

Find the company’s income statement and identify the trend in basic earnings per share, including discontinued operations. Did discontinued operations have a significant impact on EPS?

For the most recent year, what is the average number of shares of common stock that was used to compute basic earnings per share? Why is that number different from the number outstanding in the company’s balance sheet?

Please, no handwritten answers/photo answers. Thank you.

Answer 1

            Memo: Analyzing Stockholders’ Equity and EPS (Amazon Inc.)

The Manager

30-Aug-2018

From

XYZ

Subject:   Important financial information about Stockholders’ Equity and EPS

I would like to bring in your attention some important financial information of Amazon INC 2016, 2017 & 2018 financial year.

1. For the most recent day indicated (29 Aug, 2018), the highest and lowest prices at which the company’s common stock sold are US: AMZN $2001.75 & US: AMZN $1950.28 respectively.

2. Attached is the company’s Total Liabilities & Stockholder’s equity

LIABILITIES AND STOCKHOLDERS’ EQUITY    

(in millions, except per share data)                                          2016    2017                                                                                                   

Current liabilities:

Accounts payable                                                                   $ 25,309 $ 34,616

Accrued expenses and other                                                    13,739 18,170

Unearned revenue                                                                     4,768 5,097

Total current liabilities                                                            43,816 57,883

Long-term debt                                                                       7,694 24,743

Other long-term liabilities                                                    12,607 20,975

Commitments and contingencies (Note 7)

Stockholders’ equity:

Preferred stock, $0.01 par value:

Authorized shares                                                                         — 500

Issued and outstanding shares — none                                       — —

Common stock, $0.01 par value:

Authorized shares                                                                          — 5,000

Issued shares — 500 and 507

Outstanding shares — 477 and 484                                                     5 5

Treasury stock, at cost                                                              (1,837) (1,837)

Additional paid-in capital                                                       17,186 21,389

Accumulated other comprehensive loss                                 (985) (484)

Retained earnings                                                                         4,916 8,636

Total stockholders’ equity                                                         19,285 27,709

Total liabilities and stockholders’ equity                               $ 83,402 $ 131,310

The number of outstanding shares of common stock in 2016 & in 2017 is 477 & 484 respectively and the average price at which those shares are originally sold in 2016 & 2017 is 36.03 & 44.20 respectively.

However par value of share is $0.01. As additional paid up capital is 17186 & 21,289 in 2016 & 2017 respectively, it means shares are issued at premium.

Average price per share = Total paid up capital including additional paid up capital/ no. of outstanding shares

Average price per share in 2017 =    21394/484 = $44.20

3. Current market price of Amazon Inc. is $1998 and the average price calculated in part 2 is $44.20 at which shares were originally sold. It means, once trading starts, share prices are largely determined by the forces of supply and demand. A company that demonstrates long-term earnings potential may attract more buyers, thereby enjoying an increase in share prices.

4. Attached is the company’s income statement

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

Year Ended December 31,

                                                                     2015 2016 2017

Net product sales                               $ 79,268 $ 94,665 $ 118,573

Net service sales                                       27,738 41,322 59,293

Total net sales                                       107,006 135,987 177,866

Operating expenses:

Cost of sales                                           71,651 88,265 111,934

Fulfillment                                             13,410 17,619 25,249

Marketing                                                     5,254 7,233 10,069

Technology and content                         12,540 16,085 22,620

General and administrative                      1,747 2,432 3,674

Other operating expense, net                         171 167 214

Total operating expenses                     104,773 131,801 173,760

Operating income                                           2,233 4,186 4,106

Interest income                                                   50 100 202

Interest expense                                           (459) (484) (848)

Other income (expense), net                          (256) 90 346

Total non-operating income (expense)           (665) (294) (300)

Income before income taxes                             1,568 3,892 3,806

Provision for income taxes                                (950) (1,425) (769)

Equity-method investment activity, net of tax      (22) (96) (4)

Net income                                                           $ 596 $ 2,371 $ 3,033

Basic earnings per share                                     $ 1.28 $ 5.01 $ 6.32

Diluted earnings per share                                    $ 1.25 $ 4.90 $ 6.15

Weighted-average shares used in computation of earnings per share:

Basic                                                                                   467 474 480

Diluted 477 484 493

Trend in EPS is increasing significantly. In 2016, EPS was reported as $ 5.01 and in 2017 it has increased to $6.32. It indicates higher profitability for shareholders.

5. For the most recent year, the average number of shares of common stock that was used to compute basic earnings per share is 480. However, no. of outstanding shares is 484. This might be because of following reason.

Basic EPS does not factor in the dilutive effect of additional securities. When the capital structure of a company includes stock options, warrants  etc. these investments, if exercised, could increase the total number of shares outstanding in the market.