1

Class 9
Liabilities and Equity
 2
Recap
Debt Equity

Care about net income

Investment in Affiliates
Dividend treated as decrease in investment.

Trading securities (TS) Securities available for sale (AFS)

Changes in MV Changes in MV recognized on
recognized on I/S B/S
 3
Market Value Method

 By December 31,WMY’s fiscal year-end, the market value of ABC’s shares has
dropped from $60 to $58 per share. (Remember: On January 5, Sage acquires 10,000
at a cost of $60/share.) How much has Sage’s portfolio value changed?

Market value at year-end ($58 per share × 10,000 shares) $ 580,000

Cost ($60 per share × 10,000 shares) $ 600,000
Unrealized holding loss on TS portfolio $ (20,000)
 4
Market Value Method
NOTE: Realized gains and losses go on the Income Statement,
regardless of the classification.

 Trading Securities: The unrealized holding loss would be reported on the Sage’s
income statement.
Net unrealized losses in TS (+Loss, -SE) 20,000 ← net income
Investment in TS (-A) 20,000
 Securities Available for Sale (AFS): The unrealized holding loss would be reported
directly in the stockholders’ equity section (AOCI) of Sage’s balance sheet.
Net unrealized losses in AFS (-SE) 20,000 ← Bypass net income
Investment in AFS (-A) 20,000

 Why? Purpose of holding TS and AFS

 TS: Actively trading for potential profit
 AFS: Not actively traded, held for investment
 5
Market Value Method

 On Jan. 3, Year 2, ABC’s share price drops to $55 per share. WMY Company sells
the entire portfolio (Price: 1/1, YR1=$60, 12/31, YR1=$58). How much is the
gain/loss?
▪ Cost at purchase: $600,000; BV of investment: $580,000; Selling for $550,000
▪ TS
Cash (+A) 550,000
Loss on sale of TS (+Loss, -SE) 30,000
Investment in TS(-A) 580,000
▪ AFS
Unrealized loss in AOCI (SE) = ($20,000)
The entire difference between original
Cash (+A) 550,000 costs and MV goes to the I/S
Loss on sales of AFS (+Loss, -SE) 50,000
Investment in AFS (-A) 580,000
Net unrealized loss (+OCI, +SE) 20,000
 6

 Mean 86.3 100 pts --- 6 people 99&99.5 --- 6 people 98&98.5 --- 11 people
 7
Class progress

Recording Accrual Financial

Introduction
Transactions Accounting Statements

Receivables Non-current
Inventory Investment
and cash Assets

Financial
Liabilities & Statement of
Statement
Equity Cash Flow
Analyses
 8
Agenda

 Current Liabilities
 Non-Current Liabilities
 Share Issuance
 Share Repurchase
 Dividends
 9
Liabilities

 The acquisition of assets and

payments for goods and
services is financed from two
sources:
 Equity: funds from owners
Capital
Structure
 Debt: funds from creditors
▪ Current liabilities
▪ Long-term liabilities
 10
Liabilities

 Defined as probable debts or obligations of the entity that result from past
transactions, which will be paid with assets or services.

Maturity = 1 year or less Maturity > 1 year

Current Liabilities Long-term Liabilities

 11
Wait! So how are Accrued L’s different from
the AP?
Current Liabilities - AP: Typically what you owe to suppliers
- Normally get an invoice for A/P (exact
calculation vs. estimate for accrued)

Also Called Definition

Accounts Trade Accounts Obligations to pay for goods and services used in the basic
Payable Payable operating activities of the business.

Unearned Obligations arising when cash is received prior to the

Deferred Revenues
Revenues related revenue being earned. (e.g., Starbucks card)

A formal written contract with a bank and reports the

Notes Payable N/A
amount borrowed

Obligations related to expenses that have been incurred,

Accrued
Accrued Expenses but will not be paid until the subsequent period. (e.g., tax
Liabilities payable, wage payable, interest payable)
 12
Current Liabilities – Accounts Payable

 Accounts Payable represents future obligations to suppliers for goods and services
purchased.
 Think of this as credit extended to the company by a supplier
 Journal entries:
▪ When goods/services have been received (assume the invoice and goods/services come
together):

Inventory (+A) XX
Accounts Payable (+L) XX
▪ When payment is made:

Accounts Payable (-L) XX

Cash (-A) XX
 13
Current Liabilities – Unearned Revenue

 Cash is received from customers but revenue has not been earned (goods or
services have not yet been provided).
 Instead of crediting “sales revenue” which would flow through to the income
statement, when a firm receives cash:
Cash (+A) XX
Unearned Revenue (+L) XX

 When revenue is earned (perform service or provide product):

Unearned Revenue (-L) XX

Sales Revenue (+R, +SE) XX
 14
Current Liabilities – Notes Payable

 Pomona Corporation signed a 90-day note on November 1, 2021 for $10,000 with 6
percent annual interest in exchange for equipment. Its fiscal year end date is Dec 31.
Nov. 1 Equipment 10,000
Notes payable 10,000
To record purchase of equipment.

Dec. 31 Interest expense 100

Interest payable 100
To accrue interest expense (($10,000 x 0.06 x 2/12).

Jan. 31 Interest expense 50

Interest payable 100
Notes payable 10,000
Cash 10,150
To record payment of note and interest.
 15
Current Maturities of Long-Term Debt

 The part of the loan that is due in the coming financial year
 An entity reclassifies (from long-term debt to a current liability) the amount of its
long-term debt that must be paid the next year
 Example: Wendy Construction issues a five-year, interest-bearing $25,000 note on
January 1, 2016. This note specifies that each January 1, starting January 1, 2017,
Wendy should pay $5,000 of the note. When the company prepares financial
statements on December 31, 2016,
What amount should be reported as a current liability?
$5,000
What amount should be reported as a long-term liability?
$20,000
 16
Quick Question

Purdum Farms borrowed $10 million by signing a five-year note on December 31,
2017. Repayments of the principal are payable annually in installments of $2
million each. Purdum Farms made the first payment on December 31, 2018 and
then prepares its balance sheet. What amount will be reported as current and long-
term liabilities, respectively, in connection with the note at December 31, 2018,
after the first payment is made?

A. $2 million in current liabilities and $8 million in long-term liabilities.

B. $2 million in current liabilities and $6 million in long-term liabilities.
C. Zero in current liabilities and $8 million in long-term liabilities.
D. Zero in current liabilities and $10 million in long-term liabilities.
 17
Contingent Liabilities

 Potential liabilities that arise because of events or transactions that have already occurred.
▪ Possible obligation to be confirmed by a future event; or
▪ Present obligation that may/may not require outflow of resources; or
▪ Reliable estimate of amount of present obligation cannot be made.
▪ Corporate guarantees, lawsuits, tax disputes, or alleged violations of environmental
protection laws
 Define potential?
▪ Remote: the chance the event creating this liability will occur is slight.. – Do nothing.
▪ Reasonably Possible: Future event is more than remote, but less than likely. – Disclose in a note.
▪ Probable: Future event is likely to occur
o If can estimate the amount – Recognize.
o If can’t estimate – Disclose in a note.
 18
Contingent Liabilities

 Probable & estimate-able liabilities:

Warranty expense 2,000,000

Estimated warranty liability (Warranty Payable) 2,000,000

 Reasonably Possible Lawsuits (Disclosure of litigation contingencies— JP Morgan Chase)

 19
Warranty – Contingent liability

Monthly sales were $150,000. Warranty costs are estimated at 5% of monthly sales.
In the month of sale, the company should record a debit to:
A. Warranty Payable for $7,500.
B. Warranty Expense for $7,500.
C. Sales for $7,500.
D. None of the above. No entry is required since the actual liability amount is not
known. Dr Warranty Expense
Cr Warranty Payable
Jaye's Company paid $750 cash to replace a part on equipment sold under warranty.
To recognize the payment, which of the following is correct?
A. Debit Warranty Payable and credit Cash
B. Debit Warranty Expense and credit Cash
C. Debit Equipment Expense and credit Cash
D. Debit Parts Expense and credit Cash

Dr Warranty Payable
Cr Cash
 20
Quick Question

Young Company is involved in a lawsuit. When would the lawsuit be recorded as

a liability on the balance sheet?

A. When the loss probability is remote and the amount can be reasonably
estimated.
B. When the loss is probable and the amount can be reasonably estimated.
C. When the loss probability is reasonably possible and the amount can be
reasonably estimated.
D. When the loss is probable regardless of whether the loss can be reasonably
estimated.
 21
Current Ratio

 A firm’s ability to pay current obligations

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

 A higher ratio means that there may be more assets with which current liabilities
could be repaid (should be > 1). However, if this ratio is too large, assets could
be inefficiently utilized. Industry comparison is important.
 Alternatively, Quick Ratio = Quick Assets/Current Liabilities
(Quick Assets: cash, cash equivalents such as marketable securities, and accounts receivable)

 How to improve current ratio? Repay short-term obligations, sell fixed assets,
get more long-term debt, issue shares, etc.

100 90
≈ 1.11 → = 1.125
90 80
 22
Account Payable Turnover

 The efficiency in meeting obligations to suppliers

 Generally, a low ratio could be suggestive of liquidity problems (if the
company is delaying paying off its trading debts it’s possible it’s short on
cash).

𝑪𝒐𝒔𝒕 𝒐𝒇 𝑮𝒐𝒐𝒅𝒔 𝑺𝒐𝒍𝒅

𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆 𝑻𝒖𝒓𝒏𝒐𝒗𝒆𝒓 =
𝑨𝒗𝒆𝒓𝒂𝒈𝒆 𝑨𝒄𝒄𝒐𝒖𝒏𝒕𝒔 𝑷𝒂𝒚𝒂𝒃𝒍𝒆

One caution is that its denominator is the average of all accounts

payable. We don’t know how quickly the company pays each individual
supplier.
 23
Examples

 Current Assets (CA)=100; Current Liabilities (CL)=80; Current Ratio?

▪ Current ratio=100/80 = 1.25

 What if firm wants to increase current ratio?

▪ A) can improve operations, thus increasing CA and improving current ratio
▪ B) can simply pay off some CL right before year end (will only work if CR > 1); What is the
current ratio if pay off $20 of A/P?
▪ Current ratio = (100-20)/(80-20)=80/60 = 1.33

 Would paying off accounts payable affect any other ratios?

▪ Accounts Payable Turnover would increase (COGS/Avg. A/P)
 24
Working Capital

 Working Capital = Current Assets – Current Liabilities

 Working capital is a measure of a company’s liquidity and short-term
financial health.
 If working capital is too bloated, there may be inefficient use of assets (e.g.
excess inventory).
 25
Quick Question

Smith Corporation entered into the following transactions:

• Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements about Smith's transactions is correct?
A. The inventory purchase on account increased working capital.
B. Collecting an account receivable increases working capital.
C. The equipment purchase decreases working capital.
D. The inventory purchase on account decreases working capital.
 26
Long-term Liabilities

Maturity = 1 year or less Maturity > 1 year

Current Liabilities Long-term Liabilities

 Noncurrent (long-term) liabilities:

All obligations that are not classified as current liabilities.
▪ Lease liabilities
▪ Private financing: Long-term loan (notes payable)
▪ Public financing: Bonds payable
 27
Lease

 The lessee (e.g., Delta) has the right to use the asset (an aircraft) and in return must
make periodic payments to the lessor (e.g., Boeing), the owner of the asset.
 Two types of leases (from the perspective of Delta)
Finance/Capital Leases Operating Leases

• Treated like a purchase of property • Treated like a rental, sometimes cancelable

• Record Lease Asset and Lease Liability on • Previously, NO asset or liability on the B/S
Balance Sheet • Record Rent Expenses on the Income
• Record Depreciation Expense and Interest Statement
Expense on Income Statement

 You are the CEO of a company that uses a lot of equipment. Which of these
treatments would you prefer?
 28
Journal Entries for Leases

After IFRS 16
 No longer distinguish operating vs. capital lease.

Most CEOs would pick operating lease to report less debt.

Is doing so for this reason OK? Nope.
 29
Bonds

 Significant debt needs are often filled by issuing debt securities (bonds) to the public.
 Companies are not the only entities that go to the bond markets to raise capital;
governments around the world also issue bonds for the same reason.
 Investors can trade bonds on established exchanges (such as New York Bond
Exchange); provide investors with liquidity.

Why bonds over equity?

 Stockholders maintain control (no voting rights).
 Interest expense is tax deductible.
 30
Agenda

 Share Issuance
 Share Repurchase
 Dividends
 31
Corporations – Shareholder Rights

 Vote in election of board of directors and on

actions that require stockholder approval.

 Share the corporate earnings through receipt

of dividends.
 32
Corporations – Shareholder Rights

 Keep the same percentage ownership when new shares of stock are issued
(preemptive right).

 Share in assets upon liquidation in proportion to their holdings. This is called a

residual claim.
 33
Structure in a Corporation
 34
Quick Question

A corporation:
A. cannot own property.
B. is managed by the shareholders.
C. has owners who have mutual agency.
D. has owners who have limited liability
 35
Share Terminology (Chipotle Example)
Management can issue up to 230 million
Authorized Shares shares of common stock per the articles of
incorporation.

As of Dec. 31, 2016, 35.833

Unissued Issued million shares had been issued.
As of Dec. 31, 2016, 194.167 Journal Entries
million shares were unissued.

Outstanding Treasury
(= Issued – Treasury)
As of Dec. 31, 2016, they had bought
Outstanding = Issued – Treasury = 35.833 – 7.019 = 28.814 back 7.019 million shares.
million shares outstanding (use this value in per-share ratios)
Chipotle Mexican Grill, Inc. (from Balance Sheet)
Stockholders’ Equity (in thousands except per-share data)
Common stock—$0.01 par value—230,000 shares authorized, and 35,833 and 35,790 shares issued as of
December 31, 2016 and 2015, respectively.
Additional paid-in capital
Treasury stock, at cost, 7,019 and 5,206 common shares at December 31, 2016 and 2015, respectively.
 36
Quick Question

RKJ Company has provided the following information:

▪ 100,000 shares of $5 par value common stock are authorized
▪ 70,000 shares have been issued
▪ 65,000 shares are outstanding
Which of the following statements is correct?

A. RKJ can issue an additional 30,000 shares of treasury stock.

B. RKJ has 30,000 shares of treasury stock.
C. RKJ can resell 5,000 shares of treasury stock.
D. RKJ can issue an additional 35,000 shares of common stock.
 37
Share Terminology

 Ordinary Shares
▪ The most basic type of share capital.
▪ Also called “common stock”
 Preference Shares
▪ Certain advantages over ordinary shareholders.
▪ Dividend preference: entitled to dividend before ordinary shareholders.
▪ Asset distribution preference: In case of liquidations.
▪ Also called “preferred stock”
 38
Share Terminology

 Par Value
▪ The lowest legal price for which a corporation may sell its shares.
▪ To define legal capital – the minimum amount of contributed capital that
must be maintained.
▪ Of little significance today. Carry-over from old bankruptcy law.
▪ No-par value stock might be permitted under certain regulatory
frameworks. A “stated value” is set for no-par stocks.
 39
Share Issuance

Ordinary Shares/
Common Stocks
Paid-in Capital in
Paid-in Capital
Excess of Par
Preference Shares/
Preferred Stocks

Two Primary
Sources of Equity Retained Earnings

Paid-in capital is the total amount of cash/assets paid into the corporation by
shareholders in exchange for shares of ownership.
 40
Share Issuance

 Initial Public Offering (IPO) or Seasoned Equity Offering (SEO)

 Journal entry:
Cash XXX ← Selling price X # shares sold
Common Stock (at Par) YYY ← “Par Value” X # of shares sold
Additional Paid-in Capital ZZZ ← Remainder of selling price
 Stock is valued on the books at its historical cost at the time of issuance,
not the current market value.

Paid-in Capital in Excess of Par Value

 41
Share Issuance - Example

 Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value ordinary
shares. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1
per share, and (b) 1,000 shares are issued for $5 per share.
(a) Dr. Cash 1,000
Cr. Ordinary Shares (1,000 x $1) 1,000

(b) Dr. Cash 5,000

Cr. Ordinary Shares (1,000 x $1) 1,000
Cr. Additional Paid-in Capital (APIC) 4,000
 42
Share Issuance - Example

 Stockholders’ equity section assuming Hydro-Slide, Inc. has retained earnings of

$27,000. How much is the total stockholder’s equity?
 43
Share Issuance - Example

 Assume that Hydro-Slide, Inc. issues 2,000 shares of no par value ordinary shares.
Prepare Hydro-Slide’s journal entry if 2,000 shares are issued for $3 per share.
(c) Dr. Cash 6,000
Cr. Common Stock(2,000 x $3) 6,000

Ordinary Shares
 Shares Issued for Assets Other than Cash. On November 12, Kahn Corporation
issued 15,000 shares of its $1 par ordinary shares for equipment worth $4,000 and a
building worth $120,000. Kahn’s entry is:
(d) Dr. Equipment 4,000
Dr. Building 120,000
Cr. Common Stock(15,000 x $1) 15,000
Cr. APIC (Paid-in Capital in Excess of Par) 109,000
 44
Share Issuance - Example

 Ordinary Shares Issued for Services. Kahn Corporation engages a web designer to
create the company’s website. The website designer would ordinarily charge $25,000
for such services but agrees to accept 2,500 shares of $1 par common stock, in
settlement of the fee. The fair market value of the stock is $10 per share.
(e) Dr. Website Development Expenses 25,000
Cr. Ordinary Shares (2,500 x $1) 2,500
Cr. APIC (Paid-in Capital in Excess of Par) 22,500

 Stine Corporation issues 10,000 shares of $10 par value preference shares for $12
cash per share. Journalize the issuance of the preference shares.
Dr. Cash 120,000
Cr. Preference Shares (10,000 x $10) 100,000
Cr. APIC (Paid-in Capital in Excess of Par) 20,000
Preference share may have a par value or no-par value.
 45
Quick Question

Irish Corporation issued (sold) 11,000 shares of common stock for $69 per share.
The bylaws established a stated value of $5 per share. What is the amount of
increase in the common stock account as a result of this transaction?

A. $55,000.
B. $704,000.
C. $0.
D. $759,000.
 46
Agenda

 Features of a Corporation
 Share Issuance
 Share Repurchase
 Dividends and Stock Split
 47
Treasury Stocks

 How it works:
▪ A company buys back its own stock from investors at the market price
▪ No voting rights, no dividend rights
▪ The repurchase cost is reflected in a contra-equity account called “Treasury
Stock”
▪ When/if resold, the difference between the original repurchase cost and the
sales price is recorded in Additional-Paid-In-Capital (usually credited)
 48
Treasury Stocks

 Why?
▪ To signal management thinks stocks are undervalued. (Buy low, sell high)
▪ Benefits investors without setting dividend precedent
▪ Reduce shares outstanding, which improves performance metrics (EPS)
▪ To have shares on hand for bonus and stock compensation
▪ To have shares available for use in acquiring other companies.
 49
Treasury Stocks - Example

 Kitzer Corporation acquires 200 shares of its ordinary shares for $15/share.
Dr. Treasury Stock (+xSE, - SE) 3,000
Cr. Cash (-A) 3,000
To record the purchase of 200 shares of treasury shares
 Kitzer later resells 100 shares of its treasury shares for $20/share.
Dr. Cash (+A) 2,000
Cr. Treasury Stock (-xSE, +SE) 1,500
Cr. APIC (+SE) 500
To record the sale of 100 shares of treasury shares.

 What if the re-issuance price was $10 instead of $20?

Dr. Cash (+A) 1,000
Dr. APIC (-SE) 500
Cr. Treasury Stock (-xSE, +SE) 1,500
To record the sale of 100 shares of treasury shares.
 50
Treasury Stocks - Example

 Kitzer Corporation used 50 treasury shares for employee compensation, which was
purchased at $15/share.
Dr. Share Option Compensation 750
Cr. Treasury Shares 750
To record the reissuance of treasury shares for employee share option

 Kitzer decided to retire the rest 50 shares of its treasury shares by canceling them.

Dr. Share Capital 750

Cr. Treasury shares 750

To record the cancellation of 50 shares from treasury shares.

 51
Quick Question

CGJ Company has provided the following:

• 200,000 shares of $5 par value common stock are authorized
• 140,000 shares of common stock were issued for $11 per share
• 130,000 shares are outstanding
Which of the following statements is false?
A. Common stock is reported at $700,000 on the balance sheet.
B. Additional paid-in capital is reported at $840,000 on the balance sheet.
C. Stockholders' equity decreased $110,000 when the treasury stock was purchased.
D. There are 10,000 shares of treasury stock.
 52
Agenda

 Share Issuance
 Share Repurchase
 Dividends
 53
Cash Dividends

 Corporations may pay out a portion of their earnings to stockholders in the

form of dividends. This is part of what many investors are paying for when
they buy shares of stock.
▪ But not always!
 For a corporation to pay a cash dividend, it must have:
▪ Retained earnings
▪ Adequate cash.
▪ Declaration by the Board of Directors.
 54
Cash Dividends

 Typically fairly stable over short periods of time. Why?

▪ Investors usually see it as a very bad sign if a company cuts or stops paying
dividends.
▪ Example from Kimberly-Clark’s 2016 10-K
 55
Cash Dividend

 Dividends require information concerning three dates:

 56
Cash Dividend

Declaration date:
Record date:
Payment date:
 57
Cash Dividend - Example

 On December 1, the directors of Media General declare a $0.50 per share cash
dividend on 100,000 shares of $10 par value common stock. The dividend is payable
on January 20 to shareholders of record on December 22:
December 1 (Declaration Date)

December 22 (Record Date)

January 20 (Payment Date)

 58
Cash Dividends on Preference Shares

 When a company issues both preference and ordinary shares, the preference
shareholders receive their dividends first. The ordinary shareholders receive
dividends only if the total dividend is large enough to pay the preference
shareholders first.

 Avant Garde, Inc., has 100,000 2% preference shares (par value of $100) outstanding
in addition to its ordinary shares. The 2% designation means that the preference
shareholders receive an annual cash dividend of 2% × $100 par value per share. In
20X6, Avant Garde declares an annual dividend of $500,000. The allocation to
preference and ordinary shareholders is:
 59
Cash Dividends on Preference Shares

 What if the company was not able to pay preference dividends?

▪ This is called passing the dividend, and the passed dividends are said to be in
arrears.
▪ The owners of cumulative preference shares must receive all dividends in
arrears plus the current year’s dividend before any dividends go to the
ordinary shareholders.
 The preference shares of Avant Garde, Inc., are cumulative. Suppose Avant
Garde passed the preference dividend of $200,000 in 20X6. Before paying
dividends to ordinary shares in 20X7, Avant Garde must first pay preference
dividends of $200,000 for both 20X6 and 20X7, a total of $400,000. On
September 6, 20X7, Avant Garde declares a $500,000 dividend:
 60
Stock Dividends

 Distribution of additional shares of stocks to shareholders (on a pro rata basis) at no

cost to the stockholder.
▪ All stockholders retain the same percentage of ownership.
▪ No change in total stockholders’ equity. Amounts move around between
Contributed Capital and Retained Earnings
 No economic value. Then why would firms do this?
▪ Retain cash for investment
▪ Tax advantage: only taxable when investors sell the stocks
 61
Stock Dividend

 Suppose L’Occitane declared 10% share dividend when the share is trading at €10
per share. Assuming that there are 20,000,000 shares outstanding and par value is €
0.03 per share, L’Occitane would record the share dividend as follows:
 62
Summary
 63
Read stock quotes
 64
Dividend Yield

𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅𝒔 𝒑𝒆𝒓 𝒔𝒉𝒂𝒓𝒆 (𝑫𝑷𝑺)

𝑫𝒊𝒗𝒊𝒅𝒆𝒏𝒅 𝒚𝒊𝒆𝒍𝒅 =
𝒔𝒉𝒂𝒓𝒆 𝒑𝒓𝒊𝒄𝒆

 𝑒.𝑔., 𝑀𝑆 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑦𝑖𝑒𝑙𝑑=$1.47/$61.78=2.38%

 Dividend Yield is a great way to compare dividends across companies. It puts
them all on an equal footing.

2016 Dividend Comparison With Competitors 2016 Dividend Yield Comparison With Competitors
IBM HP Cisco IBM HP Cisco
$5.50 $0.57 $0.89 3.94% 1.67% 3.40%
 65
Earnings Per Share (EPS)

Net Income
EPS = Average Number of Shares Outstanding

 Example: Dunkin’s income for 2016 was $195,576,000 and the average number of
common shares outstanding was 92,039,248.
$195,576,000
EPS = 92,039,248 Shares ≈ $2.12 per share
 66
Earnings Per Share (EPS)

2016 EPS Comparison With Competitors

YUM! Brands Dunkin Panera
$ 2.52 $ 2.12 $ 6.18

 Is it really fair to compare EPS across firms?

▪ Different number of shares outstanding
▪ Doesn’t account for differences in the price paid for the shares

 Then, what should we do? Dunkin historical EPS

▪ Look at historical trends 2016 2017 2018
$ 2.12 $ 3.80 $ 2.71

▪ P/E ratio (= stock price / EPS) P/E Comparison With Competitors

YUM! Brands Dunkin Panera
29.68 26.03 47.31