Week 9 - Shareholders' equity.pdf

8/13/2019 Week 9 - Shareholders' equity.pdf

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KNOWLEDGE FOR ACTION

Shareholders Equity

Shareholders equity is the residual claim on assets after settlingclaims of creditors (i.e. assets liabilities)

Shareholders equity due to share issuance:

Contributed capital

Common stock

Preferred stock

Treasury Stock

Repurchased shares that may be reissued

Shareholders equity due to operations:

Retained earnings

End Retained Earnings = Beg Retained Earnings + Net Income Dividends

Accumulated Other Comprehensive Income Items that bypass the Income Statement


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Types of Stock

Preferred stock

Between debt holders and common stock holders in claim on assets

No voting r ights, but pay a fixed dividend that must be paid before common

dividends

May be callable, convertible, or redeemable

Common Stock

Voting rights, but residual claimant to assets

Par Value Stated value on shares used to compute balance in Common Stock or Preferred

Stock

Additional Paid In Capital (APIC)

Amount received in excess of par value


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Contributed Capital Terminology

Shares Authorized

Total number of shares the firm could issue

Shares Issued

Number of shares that have been sold to the public

Balance in Common Stock at Par based on this amount

Shares Outstanding

Number of shares currently held by the public

Shares issued minus treasury shares

Dividends and Earnings Per Share based on this amount


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Example: Issuing Stock - Preferred

On 1/14/2012, Stack Inc. issued 10,000 shares of no-par preferredstock for proceeds of $7 per share. The preferred stock specif iescumulative $1 annual dividends per share.

Journal entry

1/14/12 Dr. Cash (+A) 70,000 (10,000 x 7)

Cr. Preferred Stock (+SE) 70,000


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Example: Issuing Stock - Common

On 1/14/2012, Stack Inc. issued 12,000 shares of $1 par value stock forproceeds of $10 per share

Journal entry

1/14/12 Dr. Cash (+A) 120,000 (12,000 x 10)

Cr. Common Stock (+SE) 12,000 (12,000 x 1)

Cr. Addl Paid in Capital (+SE) 108,000 (Plug)

Shares issued: 12,000

Shares outstanding: 12,000


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Share Repurchases and Treasury Stock

Companies sometimes repurchase their own shares

Repurchased shares are carried in the Treasury Stock (XSE) account

Treasury stock does not have voting rights or dividend rights Treasury stock can be reissued by the firm

Reissued treasury stock is removed from the Treasury Stock account at theoriginal price paid to repurchase

APIC or Retained Earnings are used to balance the journal entry if reissue price

differs from repurchase price Companies cannot book gains or losses in trading in their own stock!


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Example: Treasury Stock Purchase

On 3/3/2012, Stack Inc. repurchased 4,000 shares of its commonstock at a price of $11 per share

Journal entry

3/3/12 Dr. Treasury Stock (+XSE) 44,000 (4,000 x 11)

Cr. Cash (-A) 44,000




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Example: Treasury Stock Sale Price Increase

On 4/4/2012, Stack Inc. sold 1,000 shares of its t reasury stock at aprice of $14 per share

Journal entry

4/4/12 Dr. Cash (+A) 14,000 (1,000 x 14)


Cr. Treasury Stock (-XSE) 11,000 (Original cost)




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Example: Treasury Stock Sale Price Decrease

On 5/5/2012, Stack Inc. sold 1,000 shares of its t reasury stock at aprice of $9 per share

Journal entry

5/5/12 Dr. Cash (+A) 9,000 (1,000 x 9)

Dr. Addl Paid in Capital (-SE) 2,000 (Plug)




Note: if APIC has a zero balance, debit Retained Earnings


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Example: Treasury Stock Retirement

On 5/15/2012, Stack Inc. decided to retire 1,000 shares of its treasurystock

Journal entry

5/5/12 Dr. Common Stock (-SE) 1,000 (1,000 x 1)

Dr. Addl Paid in Capital (-SE) 10,000 (Plug)





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Retained Earnings

Retained Earnings: Cumulative income that has not been paid out asdividends

Net income: Posit ive net income increases retained earnings; negative net

income decreases retained earnings

Dividends: Decrease retained earnings since this is a return of equity toshareholders


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Cash Dividends

Declaration date

Company declares a dividend will be paid to all investors that hold shares as ofthe date of record (e.g., 10 days after the declaration date)

Date of record Date on which investors must hold shares to be entit led to receive the dividend

An investor that sells shares after the record date is still entitled to receive thedividend

Payment date Date on which the firm pays the dividend

Note: Firms are not required to pay dividends. However, once a firmhas declared a dividend, the firm is legally obligated to pay it to its

shareholders as of the record date Create a liabili ty called Dividends Payable


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Example: Cash Dividends On 6/6/2012, Stack Inc. declares a $0.50 dividend per share to both

common and preferred shareholders of record on 6/16/2012. Thedividend will be paid on 6/26/2012.

Preferred shares issued and outstanding: 10,000

Common shares issued: 11,000; Common shares outstanding: 10,000

Journal entry

6/6/12 Dr. Retained Earnings (-SE) 10,000 (20,000 x .50)

Cr. Dividends Payable (+L) 10,000


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Example: Cash Dividends On 6/6/2012, Stack Inc. declares a $0.50 dividend per share to both

common and preferred shareholders of record on 6/16/2012. Thedividend will be paid on 6/26/2012.

Journal entries

6/16/12 No entry

6/26/12 Dr. Dividends Payable (-L) 10,000

Cr. Cash (-A) 10,000


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Stock Dividends and Splits Stock dividend

Each common shareholder is given a dividend in the form of new common shares

Each stockholders percentage ownership of the company will be identical to

what it was before the stock div idend

No cash flow involved

If dividend less than 25%: reduce Retained Earnings and increase Common Stock andAPIC using current market price of the shares

If dividend greater than 25%: reduce Retained Earnings and increase Common Stock

using the par value of the shares

Stock spilt

Each common share is replaced with a given number of new common shares

No balance sheet, income statement, or cash flow effect

Adjust number of shares authorized, issued, and outstanding, as well as the par value


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Example: Stock Dividends On 7/7/2012, Stack Inc. declared a 10% common stock dividend; i.e.,

every shareholder received new shares equal to 10% of currentshares held. The price of Stack stock on 7/7/12 was $11 per share.

Shares issued: 11,000; Shares outstanding: 10,000

Dividend will be 1,000 shares (10,000 x .10)

Journal entry

7/7/12 Dr. Retained Earnings (-SE) 11,000 (1,000 x 11)

Cr. Common Stock (+SE) 1,000 (1,000 x 1)





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Example: Stock Split On 8/8/2012, Stack Inc. announces a 2-for-1 common stock split

Shares issued: 12,000; Shares outstanding: 11,000; Par value: $1

Journal entry

8/8/12 No entry

Shares issued: 24,000 Shares outstanding: 22,000

Par value: $0.50 per share


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Accumulated Other Comprehensive Income Debits ( expenses , losses ) and Credits ( revenues , gains ) that

bypass the income statement and go directly into ShareholdersEquity

Rationale: Companies do not l ike volati le earnings caused by marketmovements. Some accounting methods require markingassets/liabili ties to fair value

Unrealized gains and losses would cause volatili ty in Net Income

Compromise: GAAP and IFRS require companies to mark-to-market,but allow unrealized gains/losses to bypass the income statement

But, Balance Sheet must balance, so unrealized gains/losses go intoAccumulated Other Comprehensive Income, instead of through Net Income intoRetained Earnings

Items go into AOCI on an after-tax basis

Tax effect of item goes into a Deferred Tax account


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AOCI Items Unrealized Gains/Losses on Marketable Securities

Under Available for Sale treatment, unrealized gains and losses from markingMarketable Secur ities to fair value are recorded in AOCI

Foreign Currency Translation Adjustments Converting the assets and liabilities of foreign subsidiaries from the foreign

currency to the domestic currency under the Current Method leads tounrealized gains and losses that go to AOCI

Pensions The difference between the actual gains/losses on pension assets and the

expected gains/losses on those assets goes to AOCI

Derivatives

For Cash Flow Hedges , unrealized gains and losses from marking Derivatives

to fair value are recorded in AOCI


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Statement of Shareholders Equity Report the changes in all of the shareholders equity accounts

Presents beginning and ending balances in each account and shows all increasesand decreases during the year

Common Stock, APIC, Treasury Stock Issuances and repurchases of stock, stock-based compensation

Retained Earnings

Net income, Dividends, and some effects of stock-based compensation

Accumulated Other Comprehensive IncomeAll items that af fect AOCI

Noncontrolling Interest

For consolidated subsidiaries with less than 100% ownership by company,

noncontrolling interest shows the claims on net assets by outside owners in thesubsidiaries


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Stock-based Compensation Restricted Stock Plans

Companies pay employees with shares of stock as compensation

Stock Option Plans

Companies grant employees the right to purchase a number of shares at a fixedprice (called the exercise or strike price) over a specified period of time (often10 years) as compensation

Most of the time, the exercise price is set equal to the stock price at the time theoptions are granted (called an at-the-money option)

Generally some vesting period (normally 1-3 years) must pass beforethe employee is allowed to sell the stock or exercise the option

The value of the restricted stock or options granted is treated as anexpense and recognized over the vesting period


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Example: Restricted Stock Grant On 1/1/2013, Stack Inc. grants 1,000 shares of stock to its CEO as

compensation. The stock price is $20 per share on the grant date. Thestock vests after two years. The par value is $0.50.

Journal entry

1/1/13 Dr. Deferred comp. expense (+XSE) 20,000 (1000 x 20)

Cr. Common Stock (+SE) 500 (1000 x .50)



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Example: Restricted Stock Vesting On 1/1/2013, Stack Inc. grants 1,000 shares of stock to its CEO as

compensation. The stock price is $20 per share on the grant date. Thestock vests after two years. The par value is $0.50.

Journal entries

12/31/13 Dr. Compensation expense (+E) 10,000

Cr. Deferred compensation expense (-XSE) 10,000

12/31/14 Dr. Compensation expense (+E) 10,000

Cr. Deferred compensation expense (-XSE) 10,000


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Example: Stock Option Exercise On 6/6/2018, the CFO exercises the 100 options to buy the stock at

the $20 exercise price. The market price of Stacks stock is $30 onthat day. Stack re-issues treasury stock to provide the shares.

The treasury stock was acquired at $11 per share

Journal entry

6/6/2018 Dr. Cash (+A) 2,000 (100 x 20)

Cr. Treasury Stock (-XSE) 1,100 (100 x 11)

Cr. Addl Paid-in-Capital (+SE) 900 (Plug)

Note: The market price is not relevant for this journal entry, but Stackwill get a tax deduction equal to ($30 - $20) x 100 shares = $1,000

These tax savings are considered a Cash Flow from Financing

This amount is taxable income for the CFO


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Earnings Per Share (EPS) Basic EPS provides a measure of how much earnings was generated for

each share of common stock held by outsiders

Reported by the company at earnings announcement

Forecasted by security analysts

Compared to price per share to get Price-Earnings (P/E) Ratio

Basic EPS =Net Income Preferred Dividends

Weighted average number of commonshares outstanding


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Example: Basic EPS For the year ended 12/31/2013, Stack reported Net Income of $25,000.

On 1/1/2013, Stack had 22,000 common shares outstanding and10,000 preferred shares outstanding. Stack issued 4,000 common

shares on 6/30/2013. Stack paid $5,000 of preferred dividends and$9,000 of common dividends during 2013

Basic EPS = Net Income Preferred Dividends

Wtd avg. number of common shares outstanding


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Basic EPS =

Basic EPS = =

Net Income Preferred Dividends


25,000 5,000

(22,000 + (4,000 / 2))

20,000

24,000

25,000 5,000

((22,000 / 2) + (26,000 / 2))


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Basic EPS =

Basic EPS = = = $0.83

Net Income Preferred Dividends


25,000 5,000

(22,000 + (4,000 / 2))

20,000

24,000


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Earnings Per Share (EPS) Diluted Companies with complex capital structures also report Diluted EPS

Complex capital structures includes securities that can be converted into stock atthe investors discretion

Convertible debt, stock options and warrants

Some of the value of these convertible securi ties is t ied to the value of commonstock; thus, investors holding these securities are indirect stockholders

Diluted EPS provides EPS assuming everything that could convert toa share of stock actually did so

Diluted EPS =Net Income Preferred Dividends + Adj. for convertibles

Wtd avg num of common shares outstanding + Adj. for

convertibles


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Diluted EPS Convertible Debt Convertible debt can be exchanged for common stock

Diluted EPS is computed under the assumption that the convertibledebt had been exchanged for common stock at the start of the period

This is called the if converted method

Numerator of EPS: Net Income is increased by the after-tax interestexpense on the convertible bond

If debt had converted, there would have been no Interest Expense, so i t is added

back to Net Income Denominator of EPS: Number of shares is increased as if the debt

was converted to common shares at the beginning of the period


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Example: Diluted EPS with Convertible Debt For fiscal year 2013, Stacks Net Income of $25,000 included $500 of

Interest Expense on convertible debt. The debt is convertible into2000 shares of common stock. The statutory tax rate is 35%.

Basic EPS = = $0.83

Diluted EPS =

Diluted EPS = = = $0.7820,000 + (500 x (1-.35))

24,000 + 2,000

20,000

24,000

Net Income Preferred Dividends + Adj. for convertibles

Wtd avg num of common shares outstanding + Adj. forconvertibles

20,325

26,000


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Diluted EPS Stock Options In-the-money stock options give the holder the right to acquire a

share of common stock at a pre-specified price

Diluted EPS is computed under the assumption that a fraction of the

options had converted to common shares This is called the treasury stock method

Numerator of EPS: No adjustment necessary

Denominator of EPS: Number of shares is increased by a fraction of

each outstanding option Number of addit ional shares = Number of options x Conversion fraction

Conversion fraction =(Avg. Stock Price Exercise Price)

Avg. Stock Price


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Diluted EPS Complications Diluted EPS must always be less than or equal to Basic EPS

Diluted EPS is set equal to Basic EPS in years when a firm has a loss fromcontinuing operations to common stockholders

If Diluted EPS would be greater than Basic EPS after a convertible is added to thecalculation, the convertible is considered antidilutive and is excluded fromcomputation of Diluted EPS

Options are considered antidilutive when the exercise price is greater than themarket price (i.e., when the option is out of the money ).


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Disclosure Example

PupCo manufactures health drinks for dogs and cats

Questions to answer from PupCos Shareholders Equity disclosures:

What are shares issued, shares outstanding, and par value for 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? What was the averageprice?

What is the average price paid to acquire all treasury shares held at 12/31/2012?


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Balance Sheet - Shareholders Equity

Shares issued

1,865

Shares outstanding

Issued: 1,865

Less Treasury: - 284

Outstanding: 1,581

Par value

1 2/3 cents ($0.01667)

(millions) 12/31/2012 12/31/2011

Preferred Stock, no par value 41 41

Repurchased Preferred Stock (150) (145)

Common stock, par value 1 2/3 per share

(authorized 3,600 shares, issued 1,865 and

1,782 shares, respectively) 31 30

Capital in excess of par value 4,527 250

Retained earnings 37,090 33,805

Accumulated other comprehensive loss (3,630) (3,794)

Repurchased common stock, at cost (284

and 217 shares, respectively) (16,745) (13,383)

Total Shareholders Equity 21,164 16,804


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Statement of Shareholders Equity Preferred and Common Stock

New stock issuance

Common Stock: $1

APIC: $4,546

Total: $4,547

12/31/2012 12/31/2011

(millions) Shares Amount Shares Amount

Preferred Stock 1 41 1 41

Repurchased Preferred Stock

Balance, beginning of year (1) (145) (1) (138)Redemptions - (5) (0) (7)

Balance, end of year (1) (150) (1) (145)

Common Stock

Balance, beginning of year 1,782 30 1,782 30

Shares issued 83 1

Balance, end of year 1,865 31 1,782 30

Capital in Excess of Par Value

Balance, beginning of year 250 351

Stock-based compensation expense 299 227

Stock option exercises/RSUs converted (500) (292)

Withholding tax on RSUs converted (68) (36)Shares issued 4,546

Balance, end of year 4,527 250


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SCF Cash from Financing Section

2012 2011

Proceeds from issuances of long-term debt 6,451 1,057

Payments of long-term debt (59) (226)

Debt repurchase (500)

Short-term borrowings, by original maturity

More than three months proceeds 227 26

More than three months payments (96) (81)

Three months or less, net 2,351 (963)

Cash dividends paid (2,978) (2,732)

Share repurchases common (4,978)

Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413

Excess tax benefits from share-based compensation 107 42

Acquisition of non-controlling interest (159)

Other financing (13) (26)

Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)

New stock issuance

Common Stock: $1

APIC: $4,546

Total: $4,547

But, no Cash Flowfrom issuing shares

Cash from new

stock issuance = $0Disclosure at bottom

of SCF: Shares wereissued for acquisition(a noncash activ ity)


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Statement of Shareholders Equity Retained Earnings and AOCI

(millions) 12/31/2012 12/31/2011

Retained Earnings

Balance, beginning of year 33,805 30,638

Net income 6,320 5,946

Cash dividends declared common (3,022) (2,768)Cash dividends declared preferred (1) (2)

Cash dividends declared RSUs (12) (9)

Balance, end of year 37,090 33,805

Accumulated Other Comprehensive Loss

Balance, beginning of year (3,794) (4,694)Currency translation adjustment 312 800

Cash flow hedges:

Net derivative (losses)/gains (111) (55)

Reclassification to net income 53 28

Net pension and medical (losses)/gains (114) 107

Unrealized gains/(losses) on securities 24 20Balance, end of year (3,630) (3,794)

Cash dividendsdeclared

Common: $3,022

Preferred: 1RSUs: 12

Total: $3,035


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2012 2011















Cash dividendsdeclared

Common: $3,022

Preferred: 1RSUs: 12

Total: $3,035

Cash dividends

paidTotal: $2,978


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Statement of Shareholders Equity Repurchased Stock

2012 payments torepurchase shares

$4,978

12/31/2012 12/31/2011


Repurchased Common Stock

Balance, beginning of year (217) (13,383) (229) (14,122)

Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649

Other (15) 129 1 90

Balance, end of year (284) (16,745) (217) (13,383)



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2012 2011
















$4,978


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$4,978

2012 average price$4,978 / 76

$65.50

12/31/2012 12/31/2011


Repurchased Common Stock

Balance, beginning of year (217) (13,383) (229) (14,122)

Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649

Other (15) 129 1 90




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Balance Sheet - Shareholders Equity

(millions) 12/31/2012 12/31/2011

Preferred Stock, no par value 41 41

Repurchased Preferred Stock (150) (145)

Common stock, par value 1 2/3 per share

(authorized 3,600 shares, issued 1,865 and

1,782 shares, respectively) 31 30

Capital in excess of par value 4,527 250

Retained earnings 37,090 33,805

Accumulated other comprehensive loss (3,630) (3,794)

Repurchased common stock, at cost (284

and 217 shares, respectively) (16,745) (13,383)



$4,978

2012 average price$4,978 / 76

$65.50

Average price all

treasury sharesheld at 12/31/2012

$16,745 / 284

$58.96


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Disclosure Example

PupCo manufactures health drinks for dogs and cats

Questions to answer from PupCos Stock-based Compensation andEPS disclosures:

What are the terms of PupCos stock options (e.g., exercise price, vesting period,length)?

What was the total fair value of stock options granted in 2012?

How much was stock-based compensation expense in 2012?

How much cash did PupCo receive from options exercised in 2012? What wasthe source of the stock sold to employees exercising options?

What type of convertibles caused Diluted EPS to be less than Basic EPS in 2012?


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Note 6 Stock-Based Compensation

Our stock-based compensation program is designed to attract andretain employees while also aligning employees interests with theinterests of our shareholders. Stock options and restricted stock units(RSU) are granted to employees under the shareholder-approvedLong-Term Incentive Plan (LTIP).

We account for our employee stock options under the fair value methodusing a Black-Scholes valuation model. All stock option grants have anexercise price equal to the fair market value of our common stock onthe date of grant and generally have a 10-year term. The fair value ofstock option grants is amortized to expense over the vesting period,

generally three years.RSU expense is based on the fair value of PupCo stock on the date ofgrant and is amortized over the vesting period, generally three years.Each RSU is settled in a share of our stock after the vesting period.

Stock option terms

Exercise price

Equal to stock priceat grant date

Length

10 years

Vesting

3 years

Valuation foraccounting purposes

Fair value based onBlack-Scholes model


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Fair value of 2012option grants

Num. granted: 26,858

Stock options

Options*Average

PriceAverage

Life**

AggregateIntrinsic

Value*Outstanding at 12/31/2011 106,011 $51.68Granted 26,858 54.09

Exercised (23,940) 43.47Forfeited/expired (2,726) 55.85

Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596

Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510

Restricted Stock Units(RSUs)RSUs*

AveragePrice

AverageLife**

AggregateIntrinsicValue*

Outstanding at 12/31/2011 6,092 $60.98Granted 8,326 65.01Exercised (3,183) 63.58

Forfeited/expired (573) 62.50Outstanding at 12/31/2012 10,662 $63.27 1.69 $700,397

* In Thousands, ** In Years


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Stock Options 12/31/2012 12/31/2013Wtd-average fair value of options granted 13.93 7.02Total intrinsic value of options exercised (000) 502,354 194,545

RSUsWtd-average intrinsic value of RSUs granted 65.01 53.22Total intrinsic value of RSUs converted (000) 202,717 124,193

As of December 25, 2012, there was $423 million of total unrecognizedcompensation cost related to nonvested share-based compensation grants.

This unrecognized compensation is expected to be recognized over aweighted-average period of 2 years.



Fair value: x $13.93


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Stock options

Options*Average

PriceAverage

Life**

AggregateIntrinsic



Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596

Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510


AveragePrice

AverageLife**







Fair value: x $13.93

Total FV: $374,132


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Statement of Shareholders Equity Preferred and Common Stock

Stock-based compexpense in 2012

$299

12/31/2012 12/31/2011(millions) Shares Amount Shares AmountPreferred Stock 1 41 1 41Repurchased Preferred Stock

Balance, beginning of year (1) (145) (1) (138)Redemptions - (5) (0) (7)Balance, end of year (1) (150) (1) (145)

Common StockBalance, beginning of year 1,782 30 1,782 30Shares issued 83 1

Balance, end of year 1,865 31 1,782 30

Capital in Excess of Par ValueBalance, beginning of year 250 351Stock-based compensation expense 299 227Stock option exercises/RSUs converted (500) (292)

Withholding tax on RSUs converted (68) (36)Shares issued 4,546

Balance, end of year 4,527 250


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SCF Cash from Operations Section

2012 2011Net income 6,338 5,979Depreciation and amortization 2,327 1,635Stock-based compensation expense 299 227Restructuring and impairment charges 36Cash payments for restructuring charges (31) (196)

Merger and integration costs 808 50Cash payments for merger and integration costs (385) (49)Gain on previously held equity interests (958)

Asset write-off 265 Excess tax benefits from share-based compensation (107) (42)Pension and retiree medical plan contributions (1,734) (1,299)

Pension and retiree medical plan expenses 453 423Equity income, net of dividends 42 (235)Deferred income taxes and other tax charges and credits 500 284Change in accounts and notes receivable (268) 188Change in inventories 276 17Change in prepaid expenses and other current assets 144 (127)Change in accounts payable and other current liabilities 488 (133)

Change in income taxes payable 123 319Other, net (132) (281)Net Cash Provided by Operating Activities 8,448 6,796

Stock-based compexpense in 2012

$299


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Stock options

Options*Average

PriceAverage

Life**

AggregateIntrinsic



Outstanding at 12/31/2012 106,203 $54.03 5.19 $1,281,596

Exercisable at 12/31/2012 67,304 $50.26 3.44 $1,040,510


AveragePrice

AverageLife**





Cash from exercise

Num. exercised: 23,940

Avg. Price: x 43.47

Total Cash: $1,041


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2012 2011Proceeds from issuances of long-term debt 6,451 1,057Payments of long-term debt (59) (226)Debt repurchase (500) Short-term borrowings, by original maturity

More than three months proceeds 227 26More than three months payments (96) (81)Three months or less, net 2,351 (963)

Cash dividends paid (2,978) (2,732)Share repurchases common (4,978) Share repurchases preferred (5) (7)Proceeds from exercises of stock options 1,038 413Excess tax benefits from share-based compensation 107 42

Acquisition of non-controlling interest (159) Other financing (13) (26)Net Cash Provided by/(Used for) Financing Activities 1,386 (2,497)

Cash from exercise


Avg. Price: x 43.47

Total Cash: $1,041


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12/31/2012 12/31/2011(millions) Shares Amount Shares AmountRepurchased Common StockBalance, beginning of year (217) (13,383) (229) (14,122)

Share repurchases (76) (4,978) Stock option exercises 24 1,487 11 649Other (15) 129 1 90



Cash from exercise


Avg. Price: x 43.47

Total Cash: $1,041

Source of stock

Treasury shares: $1,487

Avg price = $61.96

($1,487 / 24)


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Note 11 Earnings per Common Share

2012 2011Earnings Shares Earnings Shares

Net income $6,320 $5,946Preferred dividends and redemptions (6) (6)

Net income for common shareholders $6,314 1,590 $5,940 1,558

Basic earnings per share $3.97 $3.81

Dilutive securities:Stock options and RSUs 23 17ESOP convertible preferred stock 6 1 6 2

Diluted $6,320 1,614 $5,946 1,577

Diluted earnings per share $3.91 $3.77

Basic earnings per share is net income available for common shareholders divided by the weighted average ofcommon shares outstanding during the period. Diluted earnings per share is calculated using the weighted average ofcommon shares outstanding adjusted to include the effect that would occur if in-the-money employee stock optionswere exercised and RSUs and preferred shares were converted into common shares. Options to purchase 24.4 million

shares in 2012 and 39.0 million shares in 2011 were not included in the calculation of diluted earnings per commonshare because these options were out-of-the-money.

Why Diluted EPS< Basic EPS

Convertiblepreferred stock

Stock options andRSUs

But note thanmany moreoptions are out-of-

the-money!

Week 9 - Shareholders' equity.pdf

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Transcript of Week 9 - Shareholders' equity.pdf