Monday, July 08, 2013

Common Stock Characteristic

Book value of common stockholders’ equity of  CFM, Inc., December 31, 2008
(figures in millions).

The maximum number of shares that can be issued is known as the authorized share capital; for CFM it was 2 billion shares. If management wishes to increase the number of authorized shares, it needs the agreement of shareholders. By December 2008 CFM had issued only 958 million shares, so it could issue over a billion more without further shareholder approval.

Most of the issued shares were held by investors. These shares are said to be issued and outstanding. But CFM has also bought back 223 million shares from investors. Repurchased shares are held in the company’s treasury until they are either canceled or resold. Treasury shares are said to be issued but not outstanding.

The issued shares are entered into the company’s books at their par value. Each CFM share had a par value of $1.00. So the total book value of the issued shares was (958,000,000 shares*$1.00 )= $958 million

The price of new shares sold to the public almost always exceeds par value. The difference is entered in the company’s accounts as additional paid-in capital or capital surplus.So if CFM sold an additional 100,000 shares at $40 a share, the common stock account would increase by (100,000 *$1.00) = $100,000 and the capital surplus account would increase by (100,000 *$39.00) = $3,900,000.

The next entry in the common stock account shows the amount that the company has spent on repurchasing its common stock. The repurchases have reduced the stockholders’ equity by $14,015 million.
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