Question

Ch11 & Ch12 & Ch13 Case Studies (150-250 words each chapter)

Ch11 Case Study – Stockholders’ Equity Terms

Part 3: Describe and explain a stock split. Explain how a stock split is computed

Ch12 Case Study – Ratio Analysis

Part 3: “Describe” the Ch11 – payout and return on common stockholders’ equity ratios (Review pages 593 to 596). Explain the importance of each ratio and how each ratio assists the investor in evaluating a company’s performance.

Ch13 Case Study – Financial Statement Analysis

Part 3: Describe Irregular items for financial statements. Provide a real life business example for irregularitems for financial statements. Explain how Extraordinary items affect the investor’s evaluation of the company’s performance. (Review pages 692 to 693)

Answer 1

Ch 11 Stock split is an action or activity by the company whereby it divides its existing shares of larger amount into multiple shares of small amount per share based on stock split ratio. It leads to increase in the number of outstanding shares of the company, however, total value of share capital of the company continues to remain same as was before stock split. For example :- a stock split of 2 for 1 or 2:1 means for every 1 share held by an investor, after stock split he will get 2 shares in place of his every 1 share. Further assume ABC Corp. had 20 million shares outstanding and shares are currently traded at $100, then market capitalization of ABC Corp will be $2 billion. Assume, that ABC decided a stock split of 2:1 . Now after stock split total number of shares outstanding of ABC will increase to 20 million x 2 = 40 million and share price will be 100/2 = 50 per shares. Thus, its market cap. Will still remain to be 40 million x 50 = 2 billion.

Ch 12 . Payout ratio = dividend per share / earning per ratio . It indicates how much of earning or net income has been distributer to the stockholders by way of dividend.

Bh this ratio and investor evaluate how liberal company is with respect to distributing it's earning by way of dividend.

Return on common stock = net income attributable to common stockholders / common stockholders equity. It indicates how much Return company is able to provide to common stockholders on the amount invested by them

By this ratio common stockholders try to evaluate how much Return are they getting on the amount invested by them, if the return is greater from their expectations they remain invested but however, if it is lesser then their expectations or they can get more return somewhere else they generally tends to sell their investment from the company and invests their fund somewhere else where they can get more return as compared to their present investment .

Ch 13 . Irregular items for financial statement are those items which do not occur frequently or are one time charges that are not expected to occur in the future except in case of exceptional situation.

Example of irregular items are litigation expenses on the case file for any infringement of intellectual property rights or any other litigation expense. Another example is losses caused due to any unfortunate event like hurricane, tornado etc.

Extraordinary items are generally shown separately or in the notes to financial statements it is because first of all since it is unlikely to occur in the future and secondly it may be of huge amount and may unnecessarily distort the picture of financial statements that is why it is shown separately so that investors can analyze financial statements in a normal scenario . However, with regard to such items investors generally are very cautious and analyze that whether any such extraordinary item is affecting going concern of the company like huge litigation expense and any incidental effects relating to it.