Fundamental of Corporate

Finance
CHAPETER FIVE
COMMON STOCK AND INVESTMENT BANKING PROCESS
Some formulae
 
Numerical problem number 1
Given •Solution
No of Authorized share =1,000,000 (a)No. of outstanding share =No of issued share- No . of
treasury stock.
Par value = Rs.100
=00,000- 80,000
No. of issued share = 6,00,000
=5,20,000 shares
No. of treasury Stock = 80,000 (b) Amount raised by the company under existing
Additional paid in ca pital=Rs.4,000,000 authorization including treasury stock :
Retained earning = 5,000,000 No of authorized share 1,000,000
(a)How many shares are outstanding=? Less no. of outstanding shares 5,20,000
(b)Amount raised by the company under existing Number of available share4,80,000
authorization including treasury stock(Stock sells at Amount raised = Number of available share × issue price
Rs125) =? per share
©Common stock and additional paid in capital after = 4,80,000 × 125
financing =? =Rs.6,00,00,000.00
 ……..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
Particular
Issue Price=Rs.10 for 300,000 shares and Rs.25 for 100,000 shares Amount(Rs.)
Paid in capital= Rs.1,500,000.00 Authorized capital 1,000,000@Rs.10 10,000,000.00
Issued capital 400,000@Rs.10 4,000,000.00
Retained earning =Rs.1,600,00.00 Common stock 400,000@Rs.10 4,000,000.00
Treasury stock =10,000 shares@Rs.10 Additional Paid in capital 1,500,000.00
Required: Common stockholders equity Retained
accountearning
in the balance sheet. 1,600,000.00
Less: Treasury stock(10,000 (100,000.00)
Shares@10)
Net common equity 7,000,000.00
 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 Balance sheet ,December 31,2005 )
shares
Current 2,800,000 Account payable 250,000
Compute the new balance Assets(1,000,000+30,00
sheet and new book value per 0×Rs.60)
share
Fixed Assets 1,500,000 Notes Payable 150,000
Long term debt 400,000
Here,
Common stock(50,000 2,500,000
No of remaining authorized authorized , 50,000
shares=50,000-20,000 issued @Rs 50)
=30,000 shares Paid in capital(200000 500,000
+30,000 Shares ×Rs.10)
Retain earning 500,000

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

…….continued problem 4(b)

•  
 Problem 5 •  
(a)Given,
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
 
Problem no 6
Given,
Total no of director(#)=9
Total no of common stock(N)=500,000
Company adopt cumulative voting system
No of shares held by Mr Bijaya=240,000
(a) If all directors are elected once a year , how many director can be elected by Mr, Bijaya
=?
Problem 6
continued..
 
 Problem no. 7
Given,
No. of share outstanding (N)=800,000
Total no. of director to be elected(#)=10
 
No of shares that would have to control by Mrs. Aryal to elect one new director with
certainty under Majority( Non 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…….
 
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…….
 
Problem 8…….
 
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.
THANK YOU