Fundamental of

Corporate Finance
CHAPETER FIVE
COMMON STOCK AND INVESTMENT BANKING PROCESS
Some formulae
 
 • Solution

Numerical problem (a)No. of outstanding share =No of issued share-

No . of treasury stock.
number 1
=6,00,000- 80,000
Given
=5,20,000 shares
No of Authorized share =1,000,000
(b) Amount raised by the company under existing
Par value = Rs.100 authorization including treasury stock :
No. of issued share = 6,00,000 No of authorized share 1,000,000
No. of treasury Stock = 80,000 Less no. of outstanding shares 5,20,000
Additional paid in ca pital=Rs.4,000,000 Number of available share 4,80,000
Retained earning = 5,000,000 Amount raised = Number of available share ×
issue price per share
(a)How many shares are outstanding=?
= 4,80,000 × 125
(b)Amount raised by the company under =Rs.6,00,00,000.00
existing authorization including treasury
stock(Stock sells at Rs125) =?
©Common stock and additional paid in
capital after financing =?
 ……..Continued Problem no 1.
1(c )
Shareholder equity account after raising new stock
Particular Amount(Rs)

Common stock(10,00,000 × Rs.100 Par) 10,00,00,000.00

Additional paid in capital(Rs.40,00,000.00 +4,80,000× Rs.25 1,60,00,000.00
Retain earning 50,00,000.00
Total equity 12,10,00,000.00
 Problem no 2
Given,
Authorized no of share=1,000,000
Issue Price=Rs.10 for 300,000 shares
and Rs.25 for 100,000 shares Particular Amount(Rs.)
Paid in capital= Rs.1,500,000.00
Solution: Authorized capital 1,000,000@Rs.10 10,000,000.00
Issued capital 400,000@Rs.10 4,000,000.00
Retained
Common earning =Rs.1,600,00.00
stockholders Common stock 400,000@Rs.10 4,000,000.00
equity account
Treasury stock =10,000 Additional Paid in capital 1,500,000.00
shares@Rs.10 Retained earning 1,600,000.00
Less: Treasury stock(10,000 Shares@10) (100,000.00)
Required: Common stockholders Net common equity 7,000,000.00
equity account in the balance sheet.
 Problem 3 •  
Given,
No . of authorized shares=500,000
Common stock(Rs.10 par)=Rs.3,000,000
Additional paid in capital= Rs. 3,000,000
Retain earning =Rs 1,600,000
Treasury Stock(40,000 shares)=Rs.400,000
Net common equity =Rs. 7,200,000
(a) How many Shares are issued (N)=?
(b) How many Shares are Outstanding?
(c) How many more shares can be issued ?
(d) If co issued 100,000 shares @Rs.25 per
share , show the effect in equity account.
(e) Instead of issuing additional shares, if the
company bought back 60,000 shares at
Rs.10 per share. Show the effect in equity
account.
(d) ………CONTINUED PROBLEM NO 3

Company issued 100,000 shares @Rs.25 per share

Equity account of Bagmati Finance co

Particular Amount(Rs.)

Common stock(Rs 10 Par value)(300000 +100000) 4,000,000.00

Additional Paid in capital(3,000,000+100,000×15) 4,500,000.00

Retain earning 1,600,000.00

Less: Treasury Stock(40,000 Shares @Rs.10) 400,000.00

Net common equity 9,700,000.00

 (e) ………CONTINUED PROBLEM NO 3

Company bought back 60,000 shares at Rs.10 per share. Show the effect
in equity account.

Equity account of Bagmati Finance company

Particular Amount(Rs)
Common equity(Rs.10 Par) 3,000,000.00
Additional Paid in capital 3,000,000.00

Retain earning 1,600,000.00

Less: treasury stock(100,000 shares @Rs. 10) (1,000,000.00)

Net common Equity 6,600,000.00
 Problem no .4
Given, •  
Common stock=Rs.1,000,000
Paid in capital =Rs.200,000
Retain earning=Rs.500,000
Authorized share =50,000 Shares
Outstanding no of share=20,000 Shares
(a)Book value per share of Acer’s common stock =?
 ……Continued Problem 4
Acer company
(b) Balance sheet, December 31 …….
Company sold remaining Assets Amount(Rs.) Equity Amount(Rs)
authorized shares @Rs 60 per Current Balance sheet ,December
2,800,000 31,2005
Account payable 250,000
shares Assets(1,000,000+30,000×R
Compute the new balance s.60)
sheet and new book value per
share Fixed Assets 1,500,000 Notes Payable 150,000
Long term debt 400,000
Here, Common stock(50,000 2,500,000
authorized , 50,000 issued
No of remaining authorized @Rs 50)
shares=50,000-20,000
Paid in capital(200000 500,000
=30,000 shares +30,000 Shares ×Rs.10)
Retain earning 500,000

Total Asset 4,300,000 Total equities 4,300,000

…….continued problem 4(b)

•  
 Problem
(a)Given,
5 •  
Account Payable=Rs.64,000
Notes Payable =Rs. 71,000
Long Term debt= Rs. 151,200
No. of authorized common
stock=30,000
No of outstanding common stock
=20,000
Retain earning=336,000
Common stock=Rs. 364,000
Book value per share=?
 …..Continued problem 5
(b)Given, •  
Firm sold the remaining
authorized shares @ Rs.32.55
No. of authorized share
=30,000
No of outstanding
share=20,000
New book value per share =?
…..continued problem 5
d. Explain how market value per share would be different from book value per share?
Answer,
The market value per share is obtained by demand and supply factor and earning capacity of
the stock whereas the book value is determined on the basis of total book value of equity and
number of shares outstanding. Therefore market value and book value per share are different.
 Voting right
Common stockholder can attend annual general meeting
and cast the vote . Each share of stock has one vote for
each director at general annual meeting. Therefore the
owner of 1000 share has 1000 vote for each director to
be elected.
Types of voting system
1.Non cumulative voting system
2.Cumulative voting system
Formulae
1.Non
  cumulative(Majority )Voting system
No of vote share required to elect one director=Total no of issued
share=+1
2. Cumulative voting system
+1
Where,
req=required no of vote to elect desired no of director
des=desired number of director
#= Total no of director to be elected
  Solution,

We have

Given, +1
Problem no 6
Total no of director(#)=9 240,000

Total no of common stock(N)=500,000 des

Company adopt cumulative voting system Therefore, Mr Bijaya Karki who is

disagree with current management can
No of shares held by Mr Bijaya=240,000 elect 4 directors with certainty.
(a) If all directors are elected once a year , how
many director can be elected by Mr, Bijaya =?
 Given,
Problem no.outstanding
No. of share 7
(N)=800,000
 Solution

Req =Total
+ 1 no. of director to be
elected(#)=10
=+1
No of shares that would have to
= control by Mrs. Aryal to elect one new
directorMrs
Therefore, withAryal
certainty
shouldunder Majority(
Non 400,001
control Cumulative) voting
shares to system =?
elect one director with
certainty under majority
voting system.
Problem 6
continued..
 (b) No of shares that would have to control by Mrs. Aryal to elect one director under
majority voting system(req)=?

Solution
+1

Therefore Mrs. Aryal should have to control 72728 shares to elect one director
with certainty under cumulative voting system.
Problem 5.8
Given,
No of shares outstanding(N) =500,000 shares
No of share held by dissatisfied shareholder=10% of 500,000=50,000 shares
No of share held by majority customer=70 % of 500,000.=350,000 shares
No or share held by other customer =20 % of 500,000=100,000 shares
Total no of director to be elected (#)=10
(a) If voting is non-cumulative , can a dissatisfied customer elect himself as a director?
 Problem 8…….
 Solution to (a)
If voting is non cumulative ,
No of shares required to elect desire no of director(req) = +1
+1
= 250,001 shares
If voting is no cumulative, dissatisfied shareholders can not elect
himself as a director because he will need 250,001 shares to
elect himself as a director but he owes only 50,000 shares.
Problem 8…….
(b)If the dissatisfied shareholder able to persuade all the minority shareholders, can he elect
himself as a director under non cumulative voting system?
Answer,
If a dissatisfied shareholder persuade all other minority shareholders he can get 150,000
vote(30 % of 50000) but he need 250,001 vote to elect himself as a director so he can not elect
as a director under this technique also.
Problem 8…….
 (
C) If voting is cumulative can a dissatisfied shareholder elect himself
as a director?
Solution,
No . Of shares required to elect one director(req)
= +1
=+1
=45,456 shares
Under cumulative voting system 45,456 votes are required to elect
one director. Dissatisfied shareholder has 50,000 shares so he can
elect himself as a director under cumulative voting system.
Problem 8…….
(d) What percent of minority shares other than a dissatisfied
shareholders will need to have voted for him to elect himself as a
director?
Answer,
Dissatisfied shareholder can elect himself as a director with his own
shares so won’t required vote from other shareholders.
Problem 8…….
 
What is the no of directors can minority shareholders can elect with certainty?
Solution,
No of share held by Minority shareholders(N)=30%of 500,000=150,000
Total no director to be elected(#) =10
desired no director to be elected with 150,000 votes(des) =?
Here,
Req = +1
150,000 + 1
des = 3.3=3 directors
Therefore, Minority shareholders can elect 3 directors with certainty .
THANK YOU