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Corporate Finance Law Math Sheet for use with the Corporate Finance Law outline at Emory Law School taught by Prof. George Shepherd

Corporate Finance Law Math Sheet for use with the Corporate Finance Law outline at Emory Law School taught by Prof. George Shepherd

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Miscellaneous (Background Equations Alphabetized)

Balance Sheet

Assets = Liabilities + Equity

Book Value

= Value of Co.s Assets Total Liabilities taken from Balance Sheet

Capitalization (Cap) Rate

= annual net operating income/cost (or value)

Cash Ratio

= Cast + Short-term liabilities/Current liabilities

Current Ratio

= Current Assets/Current Liabilities

Debt/Assets Ratio (the higher the ratio, the higher the burden on the company of interest payments and repaying debt.

= Total Liabilities/Total Assets

Debt/Equity Ratio

= Total Liabilities/Total Stockholders Equity

Dividend Yield Ratio

= Dividend per Share/stock price

Gross Profit

= Sales Cost of Goods Sold

Gross Profit Margin

= Gross Profit/Sales

Earnings per Share

Divide net earnings by # of shares

Basic: # of earnings can be either average # of shares issued and outstanding in a given year

Diluted: # of shares and # of shares that would have been outstanding if all stock options were exercised and all

convertible securities were converted to stocks

Market-to-Book Ratio

= Stock Price/Book Value per Share

Net Asset Value of a Stock

See Book Value

Net Operating Income (NOI)

= Operating Income Operating Expenses

Poison Pill Flip-Over Clause

B/H or S/H is allowed to obtain each # of shares of the acquiring company, equaling the current purchase price

by:

(1) Multiplying the then current purchase price times the # of shares for which the right was exercisable; and

(2) Dividing that product by 50% of the then current per share market price of the C/S.

Price-Earnings (P/E) Ratio

= Market Price per Share/Earnings per Share

Profit Margin

= Net Income/Sales

Return on Equity

= Net Income/average SHs equity

Shareholders Equity

= Assets - Liabilities

Surplus

Capital Surplus

= Assets Liabilities Stated Capital (Capital protected via Par)

Earned Surplus

= Accumulated Profits Accumulated Losses Dividends paid out of Earned Surplus

Total Assets

= Current Assets + Long Term Assets (stuff not to be converted into case w/in 1 yr)

Working Capital

= Current Assets Current Liabilities

I. Discounting and Present Value

A. Compounding

1. What is it? One of two ways to calculate interest on an investment.

a.

First way: Simple Interest interest is only eanred on the invested sum itself over

the course of the investment.

b.

Second way: Compound Interest Interest earned during one period is reinvested

and earns interest on itself in subsequent periods. Interest can be compounded

annually, semi-annually, quarterly (every three months), monthly, or even daily.

2. Formula:

a.

Simple Interest

i.

FV = s (1 + r)

b.

Compound Interestinterest is compounded and added to the sum. At the end of

year 2, the value of s is:

i.

V2 = (1 + r)2

3. Rule of 72s: The result of dividing the number 72 by the rate of compound interest to be

earned approximates the number of years it would take for a given sum of money to double.

a.

Ex. An investment earning compound interest at an annual rate of 6% would double

in ~12 years [72 6]

B. The Frequency of Compounding

1. Effective Annual Rate:

a.

Formula: Determine the future value you will have at the end of the year for each

dollar invested, and subtract one from that amount:

i.

Effective annual rate =

(1 + Annual Percentage Rate)m 1

N

ii.

m = number of periods in each year; N = the total number of periods.

C. Present Value

1. Basic Discounting to Present Value

a.

Formula: In calculating PV we move backwards through timefrom a future date

back to todaythrough the process of discounting.

i.

PV of a Lump Sum

o PV = Sum

(1 + r)n

o PV = present value, S = sum, n = the number of years, and r =

interest rate/discount rate

D. Annuities

1. PV of an annuity

o

PV = P ____P_____

r

r(1 +r)n

E. Valuing a Perpetuity

1. Formula:

a.

The calculation assumes the perpetuity will continue indefinitely.

c.

As the discount rate exceeds 10%, the incremental value of each new years payment

is only a fraction of 1%

2. Valuing a perpetuity intended to be sold:

a.

Dividend value + value of the sale:

i.

[S (current dividend value)/(1 + r)] + [S (sale)/1 + r]

b.

b.

$9.999999999

3. Hypo: What is the value of a share of preferred stock carrying an $8.00 annual dividend,

discounted at 7%, assuming it is neither redeemable by the company ("callable") nor subject

to forced redemption by the holder?

a.

If the discount rate is 7%, PV =

$8.00 = $114.29

.07

b.

If the discount rate is 10%, PV = $8.00 = $80.00

.10

F. Valuing Common Stock (re: perpetuity)

1. Price-Earnings Ratio:

= Market Value per Share

Earnings per Share (EPS)

a.

A high P/E suggests that investors are expecting higher earnings growth in the future

compared to companies with a lower P/E.

2. Valuing Perpetuities with Constant Growth:

a.

Formula: PV = __P__

r-g

i.

Note: g = constant growth rate

G. Valuing Investments with Different Cash Flows at Different Times

1. Valuing a Perpetuity with Initial Growth: Not all stocks can be expected to have growing

earnings indefinitely. In this event, there will be two periods of calculations to consider.

a.

Steps for Calculating:

i.

(1) For first year of initial growth, determine PV of initial dividend payment

(dividend * discount rate in Table for year 1)

ii.

(2) For X year of growth, dividend payment = dividend from year before *

(1+ growth rate). Then find PV of that dividend (multiply dividend * interest

rate from Table 3-4 using year X)

iii.

(3) Sum all of these PV values for initial growth years

iv.

(4) Once it stops growing, use (Dividend/interest rate) * PV from Table 3-4

(using the number of growth years + 1 as the year)

v.

(5) Add values during growth period (Step 3) + perpetuity after initial growth

(Step 4)

b.

Ex.

i.

Assumptions:

o Initial Earnings = $1.00, growing at 4% for 5 years.

o Stable Earnings thereafter, discounted @ 10%

ii.

Calculation:

Calculation

S (Dividend Value)

(1 + r)n

Ex) Y1: $1.00/(1 + .1)1 = .9091

Y2: $1.04/(1 + .1)2 = .8595

Y5: $1.17/(1.1)5 = .7264

ceases (P/r-g) and then multiply by the discount factor

- Standard Perpetuity with constant growth:

$1.17/.10 = 11.70

- Discount Factor:

1/(1 + .1)6 = .5645

- Result: $11.70 x .5645 = 6.6046

investment with differing growth periods = $10.6805

a.

Positive Net Present Value: When the present value of returns exceeds that of

investments. A manage should acept investmeny opportunities offering rates of

return in excess of the opportunity cost of capital.

b.

Negatie Net Present Value: Opposite.

2. Formula: Testing the net present value of a project

Net Present Value of Project =

[PV of funds to be received (income) PV of funds of project (investments)]

3. QC

3.8: A

factory costs $400,000. You calculate that it will produce net cash after operating expenses of

$100,000 in year 1, $200,000 in year 2, and $300,000 in year 3, after which it will shut down

with zero salvage value.

a.

Use the present value equation; insert P for earch year ($100k); add the total; and

then subtract from CoC.

1. Declining Marginal Utility of Wealth:

5

1. Firm A (Wal-Mart) and Firm B (Amazon) expected values in 10 years:

2. These results can be converted into an expected value for each from by weighting each

outcome by its probablity and summing up the results:

3. The next step is to determine the variance of the expected earning for each firm. This is

done by measuring the deviations from the mean in each case, using a weighting process.

a.

Problem: Some deviations are less than $100 and are thus negative numbers here.

b.

Solution: alter negative numbers into positive numbers

c.

4. Standard Deviation is the square root of our variance. 68% of the results of any distribution

of outcomes normally fall within one standard deviation of the mean and 95% fall within two

standard deviations.

a.

Because we had to square our deviations to eliminate negative numbers, we have

arrived at results that are out of scale with the original results. To eliminate this, we

calculate the square root of each result:

i.

500 = 22.36

ii.

3,000 = 54.77

b.

Thus, Firm As STD is 22.36% of its expected value and Firm Bs STD is 54.77% of

its expected value.

c.

With higher STDs, investors expect higher returns. See table 3-6 on pg. 95 of the

text.

C. Risk and Diversification

1. General Principal: Diversification reduces risk.

2. Formula:

Expected Payoff = Sum of (Probability of Payoff) (Possible Payoff)

Outcome

x

Drug Fails

Drug Suceeds

Probability

.5

.5

Single-Firm Probabilities

Payoff

Rate of Return

0

-100%

$400,000

+300%

Outcome

x

All drugs fail

One drug suceeds

Both drugs suceed

Two-Firm Probabilities

Probability

Payoff

Rate of Return

.25

0

-100%

.5

$200,000

+100%

.25

$400,000

+300%

4. Applying the Standard Deviation: While both investments have the same expected value,

the two-drug investment has a lower STDwe can see this because zeros return probability

is reduced from .5 to .25.

a.

Formula:

STD = Square root of the sum of (Probability) (Possible Payoff-Expected Payoff) 2

b.

Result:

Two Drugs: = (.25)(0-$200,000)2 + (.5)($200,000 -- $200,000)2 + (.25)($400,000 - $200,000)2 = $141,421

Thus, diversification across two stocks of the same industry reduces the STD of an investment from

$200,000 to $141,421.

Risk Preimium

Formula: The expected risk premium on a stock equals:

beta times x expected market risk premium (market rate minus risk free rate).

o

Cost of Capital:

Cost of Capital = Risk Free Return + (beta x equity premium (Market rate of return Risk Free Rate))

--OR

COC = Risk-Free Return + Risk Premium

o

Ex)

Risk-Free Rate: 5%

CoC: 12% (given)

FIND BETA

12% = 5% + (B x EP)

12% = 5% + (B x 10 5)

12 = 5 + B5

7 = B5

7/5 = B

1.4 = B

I. Modigliani & Millers Irrelevance Hypothesis

A. Perspectives

1. Net Income Perspective

a.

Example

i.

Set-Up:

o Firm 1: An all equity firm with $100,000 invested that has an

expected return to shareholders of $12,000.

o Firm 2: doubles F1s by borrowing an additional $100k @ 8%

interest and would have an expected return to shareholders of

$16,000.

Firm #1

Net Income

$12,000

Firm #2

@ 8% = Net Income

The traditional approach looks only at net income, and valued earnings per share. Under this assumption, if Firm

One and Firm Two are identical, the expressed earnings should be capitalized at 12%:

ii.

iii.

iv.

v.

Better to borrow right? Set cap rate (pre-determined potential rate of return

on an investment) at 12%:

o Equity of F1: 12,000/.12 = $100k

o Equity of F2: 16,000/.12 = $133k

Thus, F2 has $133k worth

Problem with this is that it does not account for variance

o Expected earnings of associated with F2 are more volatile than F1

b/c of fixed demands of creditors regardless of whether the firm has

a good year or not.

Effect of Leverage on Profits

o

Scenerio A (Bad)

B (Normal)

C (good)

$2,000

$12,000

$22,000

Earnings to S/H

$2,00

$12,000

$22,000

Rate of Return

2%

12%

22%

example). To fit these #s with the above example just double the $.

A

$2,000

12,000

22,000

Interest

($4,000)

(4,000)

(4,000)

Earnings to S/H

($2,000)

8,000

18,000

Rate of Return

-4%

16%

36%

(18/50k

loan) =

36 RoR

be expected to demand a higher return/cap rate: 14%.

2. The Net Operating Income Approach (Modigliani and Miller Home-Made Leverage

Approach):

a.

Point: Corporations will say theyre earning more because theyre levered, but this is

crap because you can do this yourself and get the same result.

II. Capital Structure in the Real World: Relaxing the Assumptions in the M&M Hypothesis

o

10

1. Owning all the debt and equity in a leveraged firm increases total after tax wealth of

SHs because interest paid on loans reduces corporate taxes:

2. Interest Tax Shield: Every dollar paid as interest reduces corporate tax by 35% (the corp. tax

rate). So, interest tax shield = .35 x (interest payments)

a.

The funds saved from big brother are then available to the SH or for reinvestment in

the firm.

b.

Capitalizing the Deductions from Corporate Tax:

PV Tax Shield = calculated interest tax shield/interest rate on debt

a.

1. Calculations:

a.

Basic Components:

11

i.

b.

c.

Rate of return on debt = face value of debt/value of the firm x the interest

rate

ii.

Rate of return on equity = value of equity/value of firm x capitalization rate

Basic WACC:

i.

After tax cost of debt = (interest rate)(1 corp. tax rate)

ii.

2. Basic Example: Assume 50/50 structure, with 8% i-rate (cost of debt) & 15% cost of equity.

Value of firm = $100k.

3. Advanced Example: Same facts as above but with a 35% Corp tax rate

4. Note: Multiply the Overall Rate of Return % (final product) times total firm value to get the

actual return that results.

a.

The Essence:

12

IV. Wages and Excessive Debt

Common Stock (Chapter 5)

I. Limited Liability of Stockholders

II. The Problem of Dilution

A. Simple Dilution: Where a person owns 10 out of 100 outstanding shares, and the company issues

another 100 shares to third parties. Your claim has been diluted from 10% to 5% of the shares and

your voting power and claim to share and profits is less.

B. Dilution Formula

1. L = ma _(mx + p) * (a)

x+d

2. What?

a.

L = existing SHs loss through dilution

b.

m = market price of a share before issuance

c.

a = a shareholders share ownership at the ime new shares are issued

d.

x = shares outstanding before dilutive distribution; and

e.

p = proceeds from sale of new shares.

f.

d = number of shares issued in dilutive issuance

C. Forms of Dilution

1. Voting Dilution w/o Economic Dilution

a.

S/h loses voting power, but shares are not worth any less because capital doubled

with additional issuance

b.

In a close corporation, voting power may be crucial to protect your investment

c.

In a large corporation, voting power is essentially irrelevant

2. Extreme Economic Dilution (cb 289)

a.

Value of share goes from $15 to $10 when shares outstanding doubled but no

additional capital paid in (shares transferred w/o consideration)

3. Penalty Dilution (cb 290-91)

a.

Hypo: Assume a $1M investment has gone bad and creditors will have the firms

assets; however, if additional $1M is contributed, investment will be worth $1.75M.

If 100 original units were sold at $10,000 each, consider the options:

i.

Sell 100 new units at $10,000 each:

o Value after sale: $1.75M, or $8,750/unit

o Loss on original unit: $1,250

o Loss on new unit: $1,250

13

b/c he wont get anything out of it, just added losses.

ii.

Sell 133.33 new units at $7,500 each; at the end of the day, 233.33 units will

share a value of $1,750,000 or $7,500 per unit.

o Value after the sale: $1.75M, or $7,500/unit

o Loss on original unit: $2,500

o Loss on new unit: $0

o Eliminates the free rider problem but creates indifference (the

investor is now indifferent: he can invest another $10k and own

2.333 units woth a total of $17,500 and lose $2,500. If he fails to

invest, his original unit is worth $7,500 and his loss is the same.

iii.

Penalty Dilution: Sell 200 new units at $5,000 each

o Value after sale $1.75M, or $5,833/unit

o Loss on original unit: - $4,167

o Profit on 2 new units: $1,667

o Investor has a loss of $2,500 but if previous investor didnt

contribute additional money, has loss of $4,167

iv.

Extreme Penalty Dilution: Sell 400 new units at $2,500 each

o The Investor who buys 4 new units has now invested $20,000 for

$17,500 of machines, losing a total of $2,500. The free-rider who

does not invest has a unit that is now worth $3,500, so he has lost

$6,500.

o Why? We have the value of $1.75M shared by 500 units where each

is $3,500.

D. Dilution as a Takover DefenseThe Poison Pill (AKA Shareholder Rights Plan)

o

Rights exercisable at 50% discount from FMV The $40 exercise price would pruchase 2x of c/s that the s/h

would be able to purchase for $40 on the market; in otherwords, get double that worth in c/s, or $80 woth of c/s.

Bond Quotations:

Adv Current Yield =

Market Price

* could also be cash inflows, depending on which side of the tx you are working from.

So, if you purchased a bond with a par value of $100 for $95.92 and it paid a coupon rate of 5%, this is how you'd

calculate its current yield:

CY =

$95.92

Price

I. Contract Interpretation

II. Contract Terms

III. The Indenture Trustee and the Trust Indenture Act

IV. Capital Leasing

V. Asset-Backed Financing

Chapter 7 (Preferred Stock)

14

I. Introduction

i.

1. For Development-Stage Companies

2. For Public Companies

a.

i.

70% of dividends received on ANY stock are tax deductible

ii.

If recipient owns 20% or more of the stock, 80% of the dividends are

deductible.

iii.

If recipient owns 80% or more of the stock, 100% is deductible.

3. For the Issuer:

II. Dividends

III. Altering the Preferred Contract

IV. Board Duties

Options and Convertible Securities (Chapter 8)

I. Introduction

A. Long and Short Positions and Position Diagrams

1. Long Position is where an investor buys an option expecting that its value will increase.

a.

i.

Benefits opposed to buying stock:

o Buyer of stock bears the risk that its price will decline rater than

increase. Puts an entire purchase price of $100 at risk.

o Option buyer only risks the amount spent to purcahse the call

options.

ii.

Time-Value: the difference between intrinsic value and market value. The

longer a security has time to increase in value the greater its time value

o Over time this value gradually decreases to zero as the possibility of

stock increases diminishes.

o An American options time value is greater than that of a European

option because it can be exercised at any time rather than at a single

moment.

b.

No upper bound on potential profits, but there is a limit to how much you can lose

The price of the option

2. Short Position is where an investor anticipates that a stocks value will decrease over time

and therefore borrows $ to buy stock at its present value and then pay back lender with the

amount received from the sale when the stock drops and therefore pocketing the difference.

a.

Calculation:

Value of Short = Proceeds of short sale Replacement Cost

b.

A. Call Options (See above)

B. Put Options: Put options give the holder the right to sell (put) the underlying asset to the writer of the

option at a previously specified price.

1. Calcluation:

Value of Put Option = Exercise Price Market Price of Stock

Note: the value of the put option can never be less than zero. If price of stock goes up

beyond the option price, the holder simply does not sell.

III. Valuation of Options

A. 5 Factors That Enter into Pricing Options

15

1. Exercise Price The higher the exercise price in realtion to the market price of the

underlying stock, the lower the value of a call option

a.

Ex.

i.

Exercise price of $200 for a current stock price of $100 is likely to be

worthless

ii.

Exercise price of $100 for a $100 valued stock price = a 50/50 chance the

stock price will rise above the exercise price during the life of the option.

2. Stock Price == The higher the stock price relative to the exercise price, the more valuable the

call option will be.

a.

Once the stock prices rise above the exercise price, the excess of the stock price over

the exercise price represents the miniumum value of an option.

3. Exercise Price The longer the life of the option, the greater its value, all other things being

equal.

4. Variance of the Underlying Stocks Value This is the most important factor in

determining option values. The greater the variance in the value of the underlying asset, the

more valuable the call option will be.

5. Interest Rate The value of the option is partly related to opportunity cost how much

interest can you earn on your money investing it somewhere else duirng the life of the

option?

a.

Thus, when interest rates are high, not purchasing the stock and leaving the option in

existence increases the value of the option as you get your $ through investing it in

govt treasuries.

B. Bionomial Option Valuation Method (Simple - Not on exam)

1. Gain is twice as much when buying with borrowed $.

2. Ex. Current stock price = $100, 1 yr European call option @ $100, Stock price has a 50/50

chance being either $80 or $120 in 1 yr w/ a 10% i-rate.

a.

Alt. #1: Call Option. Buy 1 option which in 1 year will be worth either $0 (low) or

$20 (high).

b.

Alt. #2: Leveraged Stock Purchase. Borrow discounted present value of low bond

($80) w/ 10% i-rate = 80/1.1 = $72.73. Then buy one one share of stock at its current

price $100, both for one year.

i.

Investment in option = 100 72.73 = $27.27

ii.

Possible Outcomes:

o Low ($80) stock value loan repayment ($80) = $0

o High ($120) stock value loan repayment ($80) = $40

3. Law of One Price: Payoff on levereged investment is 2 times the payoff of 1 call option

a.

Value of 2 calls = current value of share ($100) bank loan ($72.73) = $27.27

b.

Value of 1 call = 27.27/2 = $13.63

4. Option Delta/Hedge Ratio

a.

The number of shares needed to replicate one call option.

b.

Ex. In the preceeding example, 2 calls are replicated by a levered position on 1 share.

The option delta is therefore .

i.

Option Delta =

spread of possible option prices/spread of possible share prices = 20 0/120 80 = 1/2

a.

V. Convertible Securities, Deal Protection, and Venture Capital

A. Destruction of Option Rights

B. Dilution of Option Rights

i.

16

CMP Current Market Price

Total Assets (probably something in the billions) multiplied by

1/total # of shares of C/S & P/S (probably something in the millions)

ACP Adjusted Conversion Price

CP Conversion Price

FMV Fair Market Value

Dividend value divided by total # of C/S

o i.e. dividend for $400M with 10M assets = 400/10 = $40 per

outstanding common share.

b.

2. Use of Convertible Options in Venture Capital Financing: Companies w/ VCs can use two

different types of Anti-Dilution Clauses to protect its VCs (and thereby encourage their

funding)

a.

Full-Ratchet Clause: If any shares are sold cheaply in a later round, then the

conversion price of Series A stock is reduced to the cheapest price of any shares that

are sold later on.

i.

Personifies the VCs bargainning power in negotiating their involvment.

ii.

Ex.) 1 million common shares outstanding, plus 250,000 conversion rights at

$1/share

o Conversion would yield conversion holders 20% of company

o Suppose sale of 1 share at 1 cent

o 250,000 conversion holders could now purchase 25 million shares,

out of 26 million, or 96% if there was a full-ratchet clause.

250k/.01 = 25 M

Add the extra 1 M previous shares to get 26

b.

Weighted-Average Clause: If any shares are sold cheaply, the WAC takes the average

of the shares sold for a cheaper price.

i.

This is far more desirable for the company (and existing SHs) seeking VC

financing.

ii.

Formula:

(Number of Shares previously Outstanding x Conversion Price)

+ (Consideration for additional shares)

.

Number of Shares Outstanding after additional issue

iii.

iv.

Ex.) One additional share issued for .01. Just factor in this one additional

share.

o # of shares previously outstanding = 1,000,000

o Conversion Price = 1.00

o Consideration for additional shares = .01

o # of shares outstanding after additional issue = 1,000,001.

o =$.999999999

See how the effect of the WAC leads to a better result?

I. Distributions and Investor Wealth

A. Explaining Dividend Practices

1. M&M Irrelevance Hypothesis

a.

i.

Left hand side = what each share is worth before the dividend

17

ii.

Right hand side = what each share is worth after the dividend. This is 1/3

less because of the lost productive capacity of that capital.

b.

What is it?

i.

Dividend Hypo- See pg 672

o Note that the dividend also has no effect on the value of the firm if

new funds are raised to replace the dividended funds.

ii.

Retained Earnings Hypo- See pg 673

o Share holder gets the same result simply by checking out and selling

its shares.

o This is the investor home-making the value of dividends

through sales of stocks rather than relying on dividends.

AKA home-made dividend

c.

Applying the Tax Consequences to the M&M Hypothesis: One problem for the

M&M model is that it did not account for differing tax policies on Dividends versus

Capital Gains

o When shares are sold, only the amount above what she paid for

the shares is taxable while the entire dividend is subject to the

tax.

II. Restrictions on Dividends and Other Distributions to Shareholders

A. The Revolution in Legal Capital Rules: There are certain situations where the Corp is forbidden

from paying out dividends when the Corp is INSOLVENT or the distribution will make the Corp

insolvent

1. Statutory Limits in Granting Dividends

a.

Modern Approach (MCBA 6.40):

i.

Dividends ok unless

o (1) Make Corporation unable to pay its debts as they become due in

the usual course of business

Equity test

o (2) Assets < liabilities + preference in dissolution for superior classes

of stock.

bankruptcy test

b.

Traditional/Delaware Approach 170 (more stirct)

i.

Earned Surplus (Retained earnings)

o Formula:

Accumulated profits Accumulated losses dividends

(which are paid out of eanred surplus)

o An earned surplus would indicate business is making money and

may be used to pay distribution

ii.

Stated Capital: gets the par value from the issuance. [if par = $2 and then

sold 1000 shares = $2000]

iii.

Capital Surplus: the excess over par goes into this fund [if par = $2 and the

Corp sold 1000 shares for $5, then the fund has $3000]

o (assets) (liabilities) (stated capital) i.e. the excess of the net assets

over stated capital.

III. Board Discretion and Duties in Declaring Dividends

IV. Stock Dividends and Stock Splits

A. Accounting for Dividends and Splits

1. Valuing Diluted Value of Shares Post-Dividend:

a.

Corp has 1M shares outstanding with a market value of $100 each and decalres a

stock dividend of 30% or another 300K shares. Issuing new shares means

reallocating SHs equity amounts since their value of individual stocks has been

diluted.

i.

Per the calculation above they had $100M in shareholder equity.

18

ii.

iii.

Now divide that by 1.3M shares and we get the diluted value per share down

from $100 per share to 76.92 per share.

Thus the value of the dividend is: 76.92 x 300,000 = $23,076,000.

V. Stock Repurchases

VI. Spin-Off Transactions

VII. Tracking Stock

19

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