Question

in 150 words describe

1. differences between debt financing and equity financing

2. accounting differences between preferred stock and common shares.

3. accounting for treasury shares; why do firms want to buy back their own shares? How do firms use their treasury shares?

4. accounting for cash dividend and stock dividend;

5. Accumulated Other Comprehensive Income (AOCI): why are they disclosed in stockholders' equity section?

6. How do you compute EPS? Please comment on the WSJ article I posted (GE's Numbers Game)

Answer 1

1. The differences between debt financing and equity financing

Debt financing means borrowing money in order to acquire an asset. Financing with debt is referred to as financial leverage. Using debt financing allows the existing stockholders to maintain their percentage of ownership, since no new stock is being issued.

Definition of equity financing

Equity financing involves increasing the owner's equity of a sole proprietorship or increasing the stockholders' equity of a corporation to acquire an asset.

When a corporation issues additional shares of common stock the number of issued and outstanding shares will increase. This increase will cause the previous stockholders' ownership percentage to be reduced.

Definition of debt financing

Debt financing often comes with strict conditions or covenants regarding interest and principal payments, maintaining certain financial ratios, and more. Failure to meet those conditions can result in severe consequences. In the U.S., a benefit of debt financing is that the interest on the debt is an income tax deductible expense. This income tax savings will partially offset the interest expense on the debt.

Equity financing may range from a few thousand dollars raised by an entrepreneur from a private investor to an initial public offering (IPO) on a stock exchange running into the billions.

When a firm raises money for capital by selling debt instruments to investors, it is known as debt financing. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid on a regular schedule.

2. accounting differences between preferred stock and common shares.

The difference is that preferred stocks pay an agreed-upon dividend at regular intervals. This quality is similar to that of bonds. Common stocks may pay dividends depending on how profitable the company is. Preferred stock dividends are often higher than common stock dividends.

There are many differences between preferred and common stock. The main difference is that preferred stock usually do not give shareholders voting rights, while common stock does, usually at one vote per share owned.

Many investors know a lot about common stock and very little about the preferred variety. Many of the individuals who purchase preferred stock are individual investors who usually trade via online brokers.

As mentioned above, the main difference from common stock is that preferreds come with no voting rights. So when it comes time for a company to elect a board of directors or vote on any form of corporate policy, preferred shareholders have no voice in the future of the company.

Common stock represents shares of ownership in a corporation and the type of stock in which most people invest.

Common stock tends to outperform bonds and preferred shares. It is also the type of stock that provides the biggest potential for long-term gains. If a company does well, the value of a common stock can go up. But keep in mind, if the company does poorly, the stock's value will also go down.

3. accounting for cash dividend and stock dividend

Cash dividends are paid to shareholders when a company decides not to use the money for operations, but instead, transfer economic value to its shareholders.But the transfer causes a company's share price to fall.Like a cash dividend, a stock dividend does not increase a company's value.

Separately, cash dividends and stock dividends each have specific advantages and disadvantages. Combined then, an inherent benefit of a cash-and-stock dividend could be to help mitigate the disadvantages of one payout method with the advantages of the other. In thinking about the considerations below, it becomes clear that in some cases a cash-and-stock dividend could offer shareholders more flexibility than could either one alone. And for some, a cash-and-stock dividend might be a better deal because it affords more options of how to handle the dividend.

• Cash payments offer you the advantage of choosing whether to reinvest the dividends or not.
• But if you do decide to reinvest your cash dividend back into the company, its growth rate would be slower than that of a stock dividend.
• If you collect a stock dividend, then 100 percent of your payout is reinvested into the company, which allows the dividend to grow much faster than the typical cash dividend reinvestment.