Video 9.5.1: Contributed Capital Disclosure Example

Name: Video 9.5.1: Contributed Capital Disclosure Example
Uploaded: 2016-02-05T18:52:10.675Z
Duration: 10 min 45 s

Hello, I'm Professor Brian Bushee.

Welcome back.

In this video, we're going to take a look at some financial statement disclosures

related to stock issuements, stock repurchase and dividends to see where we

can pull out some of the information that we've been learning about this week.

Let's get started.

Okay, our disclosure example we're going to look at PupCo,

which manufactures health drinks for dogs and

cats, so things like low-fat bacon smoothies or tuna and cheesy shakes.

And we're going to look at PupCo's Shareholder Equity disclosures to

answer the following questions.

What are shares issues shares outstanding and par value for the common stock?

How much cash did PupCo get from issuing new shares in 2012?

How much cash dividends were declared and paid in 2012?

How much did PupCo pay to repurchase shares in 2012 and

what was the average price that they paid?

And what's what the average price that they paid to acquired all of

their treasury shares as of 12/31/2012.

Okay, we're going to

start with the shares issues, shares outstanding, and par value disclosure.

So here is the balance sheet part of their shareholder's equity, and

we can see under the prefered stock, which has no par value, and the repurchased

preferred stock, that's like treasury stock with a preferred stock.

You can see the common stock and here we have shares issues are 1,865.

That's in millions and that's well below the 3.6 billion shares

that are authorized which means that managers could issue roughly another 1.8

billion shares before they would hit this cap of the authorized share limit.

For shares outstanding, we actually have to calculate the number.

It's not disclosed here.

So we start with shares issues of 1,865.

Then down here in the footnote we have repurchased common stock which is

the treasury shares and there it says we have 284 shares at the end of 2012.

So those are the shares owned by the company so

shares outstanding is the difference between those two which is 1,581.

And then for the par value we look back up here in the common stock line.

And we can see that the par value is 1 and 2/3 cents per share.

>> Why in the world would a company-

>> Dave, let me handle this one.

What kind of nonsense is a par value of 1 and 2/3 cents!

You know I tried to research this.

I looked at the real company and

I could not find how they came up with the par value of 1 and 2/3 cents.

So my guess is that they really wanted to do one and five ninths cents but

that would sound too ridiculous.

So you decide to do something more conventional like 1 and 2 3rds.

The next question was to look for cash from new stock issuances,

so what I've brought up here is part of PupCo's statement of share holders equity.

So it's their first look at one of these statements of share holders equity.

There is a top section which is on preferred stock and

repurchased preferred stock which is the preferred treasury stock.

And then below that we have common stock where there was a beginning balance shares

issued in an imbalance and then below that capital in excess of par value or APIC.

There's a beginning balance.

Some stock based compensation stuff that we'll talk about next video.

And shares issued.

So the two lines that have shares issued here are what we're looking for.

So they got 1 million of par value of common stock.

Plus another four, 4,546.

So that's 4.5 billion of APIC.

Which means the total common stock issued was 4,547.

Now, let's go to the statement of cash flows.

This is the financing section.

And we could look for this proceeds for

stock issuance on the cash from financing and it's let's see where.

No [SOUND].

It's I don't, I don't see it.

So it appears that there was no cash flow from issuing shares.

There's no line on here that says proceeds from issuance of common stock.

So that means that must've gotten no cash from this new stock issuance.

And, in fact, what happened is, I don't show it here.

But there was a disclosure at the bottom of the SCF saying that the share was

issued for an acquisition.

Which was a non-cash activity.

So PupCo issued the shared in return for getting the company.

There was no cash flow involved so

it doesn't show up in the cash flow statement.

So to find share issuances,

you want to look at the statement of stockholders equity.

And then to see how much of that was cash versus non-cash,

you need to go to the statement of cash flows.

A trick question huh?

What about the proceeds from exercises of stock options?

How do you know that some of the new shares were not for

stock option exercises?

>> That's a good point.

The proceeds from exercise of stock options could be

cash received from issuing the new shares at least part of them.

But as we'll see in the next video the stock options were.

Satisfied with treasury stock, not with new shares, so if you look at the whole

footnote, you're going to eventually found out that that's not the answer.

Next we're going to take a look at dividends declared.

And to see this, we go to the Statement of Stockholders' Equity again.

There's a section for retained earnings and AOCI.

Or in this case AOCL Other Comprehensive Loss.

So just quickly, we're not going to talk about the AOCL in the rest of the case but

we'll take a quick look at it.

So here at the bottom, you know, beginning balance.

Then you have each of the four items that we talked about that go through here.

Foreign currency translations fo subsidiaries outside the U.S..

Derivative gains and losses on cash flow hedges.

Pension related gains and losses, and then the one that we've covered, unrealized

gains and losses on marketable securities, which are under the available sale method.

If we go back up to the top, we have retained earnings.

We've got a beginning balance.

Goes up by net income.

And then we have all the cash dividends declared so

there's common dividends of 3022 that's $3 billion.

1 million of preferred dividends, and 12 million of dividends on restricted stock.

This is stock that was given to managers as part of their compensation.

So that's a total of 3 billion dividends declared so 3035.

We go the statement of cash flows, cash for financing section.

And we look in the middle here.

There's cash dividends paid, 2978.

And so we can see here is that PupCo has not paid all

the dividends that they've declared in cash.

There's a timing difference between when they declare it and when they pay it.

And it must straddle the fiscal year ends.

And so there's going to be a change in the dividends payable as a result of this.

So dividends declared we can get from the statement of shareholders equity.

Dividends actually paid in cash we get from the statement of cashflows.

>> That is a lot of dividends.

Why the lamb would the company pay such big dividends when it is borrowing so

much money?

That should just stop the dividends and stop the borrowing.

>> Yeah that's a good point.

PupCo borrowing about $8 billion and yet

they're paying about 3 billion in dividends.

But as we talked about previously.

Companies do not want to cut dividends because it

would be viewed as a bad signal to the market.

So PupCo's going to maintain those dividends to keep their

investors happy and then just go out and borrow money if they need to.

But hey it's 2012 moneys almost free anyway interest rates are low

why not do it.

Okay, finally we want to take a look at the treasury stock or

the repurchased stock, so we go back to the statement of

shareholders equity to look at the repurchased common stock section.

And what we're looking for is what were the payments in 2012 to repurchase shares.

So if we look at the disclosures,

we've got the beginning balance, then share repurchases, stock option exercise,

which we'll talk about in the next video, other, and ending balance.

So we can see that they paid 4,978.

To repurchase shares.

So almost $5 billion they spent to repurchase shares.

If we go to the statement of cash flows the cash from financing section we can

see towards the middle share repurchases common 4,978.

So those were all cash repurchases of treasure stock.

Coming back to the statement of stockholders' equity.

We can now figure out what's the 2012 average price.

So we can see that the 4,978 was paid to acquire 76 million shares.

So if we divide 4,978 by 76 million, we come up with 65.50 per share.

Now we can compare that to the average price for

all treasury shares held at 12/31/2012.

So I went back to the balance sheet, the shareholder's equity section.

We have the balance and repurchase common stock is 16,745.

We can divide that by the number of shares that we've repurchased,

which are 284 million.

Which means that the average price of all Treasury shares held is $58.96,

which is about $7 a share lower than the price in 2012.

Clearly, the company's stock price has gone up in 2012.

But why is the company repurchasing almost $5 billion in

stock during a year when its price went up?

Yeah I agree it's weird at first blush to see the company buying back so

much stock when their stock price is increasing but

again it could be one of these motivations that we've talked about earlier.

So even though PubCo's stock price is going up,

management could still feel it's not going up enough.

They're still undervalued.

I mean.

Have PupCo's stuff on the shelves.

That must sell really quickly because they never have it

when I'm in the pets food store.

Or it could be that, as we'll talk about next video,

PupCo has a lot of employee stock options, a lot of restricted stock grants.

And they just may need to buy tons of their own stock to

satisfy the stock-based compensation without having to issue new share,

which will dilute the current shareholders.

So one of those reasons could still apply even though their stock price is going up.

And so quite a few times in this video I talked about stock option or stock

based compensation related issues that we would get back to in the next video.

So we will pick this up time looking at those specific disclosures.

I'll see you then.

>> See you next video.

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