Can someone clarify this balance sheet concept for me?
Pretend a company has assets of 900M and liabilties of 350M. Therefore, shareholder Equity = 550M.
This only includes common stock, but not preferred stock, am I right?
Let us further assume that there are 10M shares outstanding, so each share’s market price is currently $55, correct?
Let’s also assume that par value = $10/share.
What am I supposed to take away from this? That paid in excess = $45/share? That the company made a 45 dollar profit when they issued the shares? Or that common-shareholders made a profit by purchasing the stock at 10 dollars and having it grow to 55 dollars in value?
first off. the 550M equity simply means equity. it could be preferred. it could be common. but since the problem didn’t say anything about it, you can assume it’s common. assuming 10m shares outstanding, each share is BEING TRADED at 55. the PAR VALUE is 10. note the difference. the share is worth ON PAPER 10usd. but financial market participants are PAYING 55, which allows the shareholder to sell and earn a profit of 45 usd. now thinking from the corporate structure perspective. the shareholders own the equity portion of the company. so when you say ‘the company owns’, you should be thinking ‘shareholders’. hope this clears things up a bit. key takeaways : i. equity (common or preferred) simply means whatever isn’t claimed by liab from assets. ii. par value vs. market value. iii. company owner = shareholder.
No. Equity includes preferred stock at par, common stock at par, additional paid-in capital, retained earnings, other comprehensive income, treasury stock, and minority interest.
Nope.
OK.
No.
No. Companies don’t make a profit by issuing their own stock.
No.
Without more information, you can’t conclude much.