Example Stockholders' Equity

Investor analysis of financial statements

Example: Analysis of an Equity Section of a Balance Sheet
Stockholders' Equity and Paid in Capital

The post closing year-end balance sheet of Technical Services, Inc. includes the following stockholders’ equity section (with certain details omitted):

Stockholders’ equity:
6% cumulative preferred stock, $100 par value, callable at $102, 100,000 shares authorized	$2,400,000
Common stock, $2 par value, 2,000,000 shares authorized	2,200,000
Additional paid-in capital: Common stock	1,485,000
Donated capital	410,000
Retained earnings, end of year	3,470,000
Total stockholders’ equity	$9,965,000

Instructions
From this information, compute answers to the following questions:

a. How many shares of preferred stock have been issued?

Recorded Par value of all preferred stock outstanding	$2,400,000
Divided by: Par value per share of preferred stock	$100
Number of shares of preferred stock outstanding [2,400,000 / 100]	24,000 shares

[Note: Preferred stock usually has a par value of $100 per share. In this case there is no additional paid-in capital associated with preferred stock.]

b. What is the total amount of the annual dividends paid to preferred stockholders?

Dividend requirement per share of preferred stock ($100 x 6%)	$6 per share
Times: Number of shares of preferred stock outstanding (from part a)	24,000
Annual preferred stock dividend requirement [24,000 * $6]	$144,000

c. How many shares of common stock are outstanding?

Recorded Par value of all common stock outstanding	$2,200,000
Divided by: Par value per share of common stock	$2
Number of shares of common stock outstanding [2,200,000 / $2]	1,100,000 shares

[Note: this company has no Treasury stock. Treasury shares would be sutracted from total shares, but only when they are present.]

d. What was the average issuance price per share of common stock?

Recorded Par value of all common stock outstanding	$2,200,000
Plus: Additional paid-in capital: Common stock	1,485,000
Total issue price of all common stock	$3,685,000
Divided by Number of shares of common stock outstanding (from part c)	1,100,000
Average issue price per share of common stock [$3,685,000 / 1,100,000]	$3.35 per share

[Note: this company has recorded additional paid-in capital on common stock. At least some of the stockholders paid a price greater than par value for their shares. Since stock prices tend to fluctuate, this would be a typical situation for most corporations.]

e. What is the amount of legal capital?

Par value of preferred stock issued	$2,400,000
Plus: Par value of common stock issued	2,200,000
Total legal capital	$4,600,000

[Note: Legal capital is the total of par value of all shares issued. Legal capital laws and requirements vary from state to state. Check with the Secretary of State to find out the legal capital requirements in your state. ]

f. What is the total amount of paid-in capital?

Total Stockholders Equity	$9,965,000
Less: Retained earnings	3,470,000
Total paid-in capital	$6,495,000

[Note: Paid-in capital represents all amounts paid by stockholders to the corporation in exchange for stock. Donated Capital is also called Contributed Capital. GAAP requires us to include Donated
Capital in the computation of paid-in capital. See the note below on Donated Capital.]

g. What is the book value per share of common stock? (Assume there are no dividends in arrears.)

Total stockholders' equity	$9,965,000
Less: Call value of Preferred stock [$102 * 24,000 shares]	2,448,000
Total Book Value belonging to common stockholders	$7,517,000
Divided by number of common shares outstanding (from part c)	1,100,000
Book value per share of common stock, rounded to nearest cent	$6.83

[Note: Book Value is an artificial amount. It merely represents the amount of value due to the common stockholders, divided by the number of common shares outstanding. Call price of preferred stock represents the amount that would be paid to buy out preferred stockholders.]

h. Dividends on common stock
Assume that retained earnings at the beginning of the year amounted to $745,000 and the net income for the year was $3,600,000. What was the dividend declared during the year on each share of common stock?

Retained earnings, beginning of year	$745,000
Add: Net income for the year	3,600,000
Subtotal	4,345,000
Less: Retained earnings end of year	3,470,000
Total dividends paid during the year	875,000
Less: Dividends on preferred stock (part b)	144,000
Total dividends due common stockholders	$731,000
Divided by: Number of common shares outstanding (part c)	1,100,000
Dividends per share of common stock outstanding, rounded	$ .6645

[Note: This part simply follows the general format of a Retained Earnings statement. Accountants generally carry Dividend and EPS calculations out to 4 decimal places, for greater accuracy. Most publicly traded companies have millions, perhaps even tens-of-millions of shares of common stock. It's easy to see how those 2 extra decimal places can make a big difference in accuracy when you are dealing with many shares of stock. ]