STOCKHOLDERS’ EQUITY:

PAID-IN CAPITAL
CHAPTER 11

Zia Uddin (20221-32474)

Mohsin Shahzad (20221-32334)
Muhammad Muneeb Shahid (20221-32200)
 The chapter deals with the
following key points :
• Corporation
• Public own corporation
• Paid in capital of corporation
• Organizing a business as a corporation
• Advantage and disadvantage of Organizing a business as a corporation
• Stockholders equity
• Rights of stockholders
• Common stock and preferred stock
• Book value and market price of stocks
• Book value per share of common stock
• Factors affecting market price of preferred and common stock
• Stock split, purpose and effects
• Treasury stocks
Corporation
●A corporation is a legal entity that is separate from its owners and has the ability to
enter into contracts, own property, and conduct business.

Public Own Corporation

• A public-owned corporation is a company in which a majority of the

shares are owned by the government or public institutions
Paid in Capital of Corporation

●Paid-in capital of a corporation is the portion of shareholders' equity that

represents the amount the company received from issuing shares of stock at a
price above the stock's par value.

Organizing a Business as a Corporation

• Organizing a business as a corporation means creating a legal entity

that is separate from its owners, who are protected from personal
liability for the company's debts and obligations
Advantage and Disadvantage of Organizing a
Business as a Corporation
• Organizing a business as a corporation means creating a legal entity that is separate from
its owners, who are protected from personal liability for the company's
debts and obligations
• Advantages: Limited liability, perpetual existence, and easier access to capital.
Disadvantages: Higher costs of formation and compliance, potential double taxation, and
more complex management structure.

Stockholders Equity
●Stockholder equity is the residual interest in the assets of a company after
deducting liabilities, representing the amount of a company's net assets that are
owned by its shareholders.
Rights of Stockholders

• Stockholders have the right to vote in shareholder meetings, receive

dividends, sell or transfer their shares, and inspect corporate records.

Preferred and Common Stocks

● Preferred stock represents ownership with priority over common stock in receiving
dividends and assets in the event of liquidation, while common stock represents ownership
in a company and provides voting rights to shareholders.
Book Value and Market Price of Stocks

• Book value of a stock is the value of a company's assets minus its

liabilities divided by the number of outstanding shares, while market
price is the current price at which a stock is trading on the market.

Book value per share of stock

● Book value per share of common stock is a company's total common stockholders' equity
divided by the number of outstanding common shares.
Factors affecting market price of preferred
and common stock
• The factors affecting the price of common and preferred stock
include the company's financial performance, market conditions,
interest rates, dividends, and overall economic trends.

Stock Split
● A stock split is a corporate action that increases the number of shares outstanding, while
decreasing their value proportionally, with the purpose of making the shares more affordable
and liquid, and often resulting in no significant change in the overall value of
shareholders' equity.
Treasury Stocks

• Treasury stock refers to shares of a company's stock that it has issued

and subsequently repurchased, but not retired or canceled.

Let us consider an example of an ABC company to illustrate the above

terminologies.
XYZ Corporation is a publicly-owned company that has been in operation for 10 years.
● The company has two classes of stock: common stock and preferred stock.
● As of the end of the current fiscal year, XYZ Corporation has the following stockholder equity:Common
stock: 10,000 shares outstanding at a par value of $1 per share, with a total value of $100,000.
● Preferred stock: 5,000 shares outstanding at a par value of $5 per share, with a total value of $25,000.
● Additional paid-in capital: $500,000.Retained earnings: $1,000,000.
● During the current fiscal year, XYZ Corporation had the following transactions related to its stockholder
equity:Issued 2,000 additional shares of common stock at a market price of $25 per share.
● Issued 1,000 additional shares of preferred stock at a market price of $50 per share.
● Declared and paid a cash dividend of $0.50 per share to common stockholders.
● Declared and paid a cash dividend of $1.00 per share to preferred stockholders.
● Repurchased 500 shares of common stock at a cost of $20 per share and designated them as treasury
stock.
As a result of these transactions, the stockholder equity of XYZ Corporation has changed as follows:
● Common stock: 12,000 shares outstanding at a par value of $1 per share, with a total value of $120,000.
● Preferred stock: 6,000 shares outstanding at a par value of $5 per share, with a total value of $30,000.
● Additional paid-in capital: $700,000.Retained earnings: $1,400,000.
● Treasury stock: 500 shares with a total cost of $10,000.
 Summary

●From this case study, we can see how the different components of
stockholder equity (common stock, preferred stock, additional paid-in
capital, retained earnings, and treasury stock) are affected by various
transactions such as stock issuances, dividends, and stock repurchases. It
also shows how the market price of the stock can differ from its par value,
and how treasury stock is accounted for on the balance sheet.