Does the cost of retained earnings typically exceed the cost of new common stock?
969327
I thought in my Finance class that we were told internal financing (Retained Earnings) is the cheapest form of financing!  You might want to do some more research.
22516
Unfortunately, all the accounting catches in the world don't prevent someone from having a duplicate set of data, which is the most common way to "cook the books".  If you could interface between their books and the actual stock price, and you had some serious computing power, you might be able to tell that something fishy was going on, but you'd have to have access to the data.
391481
Heh, I knew I'd heard of this HBS case before.  I'm pretty familiar with Kevin Rock, too.  Unfortuntately, I don't remember this exact case much since it's been so long.\n\nUsually on these HBS cases, they don't expect you do come up with anything novel or new.  They really care more about financial analysis that you'll probably have to do in the B case, if you have to do that.  I don't have the case handy, but really all you have to do is read it carefully and summarize what's in there.\n\nFor M&A, it usually comes down to synergies if they're in the same business.  Other things to consider might be the optimal capital structure of the newly formed companies and how they might benefit from tax savings.
1130125
Retained earnings and depreciation are accounting figures and do not represent cash flows.  Retained earnings itself cannot generate cash, neither can depreciation.\n\nOn a balance sheet, retained earnings is an accumlative figure representing the amount of income retained (or lost) by a business in each year of its existance.  It does not represent cash balances.  In fact, when preparing a cash flow statement you ignore it completely\n\nDepreciation is an attempt to ensure annual accounts, inparticular the annual profit figure, show a fair figure for profit in that year.\n\nFor example if you were a farmer who had\nincome of £10,000\nand\ncosts of £5,000 you would make a\nprofit of £5,000.\n\nHowever if bought a tractor in one year which cost £10,000 which would last for 10 years.  You would make a loss of £5,000 in one year and profit in the next 9 when the cost of the tractor was actually helping you make that profit.  Is this a fair way of showing profit?  Nope no really.\n\nThe international accounting standards require that you spread the cost of the tractor out across the years that you will get benefit from the tractor (say £10,000 divided by 10 years = £1,000 per year).  This means you would make a profit of £4,000 rather than a loss.  Much fairer.\n\nYou can calculate the cash flow (which can be negative and positive) in a particular year by starting with retained earnings in that year and adding back in the depreciation charge for the year and any other non-cash adjustments (such as provisions) and taking off any increase of Inventories, adding in any decrease in Inventories, taking off any decrease in trade creditors, adding in any increase in trade creditors and taking off any increase in debtors and adding in any decrease in debtors.  This is a very simplistic view and you would do well to look at an example.\n\nTry searching the net for How to prepare a cash flow statement using the indirect method.
206666
I think we may be mixing terminology here. It's not ROI.  Firms look at capital from either retained earnings (profits) borrowed money, or capital from investors.  The "cost of capital" is what the ownership demands from its investment. This is viewed as a cost from the firms' point of view. \n  A lot of equity traders use the idea of "cost of capital" as if they were borrowing money to invest in operations-like using margin in a brokerage account.\n  \nThink about the term.  "Cost of capital" means how much are you paying to use this money.  So, if you borrow at 10%, and are gaining 11%...your cost of capital would be 10%.\nAnd if you are gaining 2%, your cost of capital is..........still 10%.\n\nDoesn't matter that you're getting skinned alive and losing 8%.
180392
They are equivelent. Before you had 1 share of the company's stock. After you have 2 shares. Afterwards the share value, everything else being equal, is 1/2 the share value before. All it is, is a method for a company to lower the value of their stock shares by doubling the number of shares outstanding. There is the perseption among some companies that shares trading in the $30 to $40 range are more attractive to investors than shares trading in the $60 to $80 range. Generally but not always, the company will also raise the cash dividend at the same time.
25104
generally speaking, yes, when a company's profits increase, the stock price goes up. \n\nwhen you own a stock, you own a share of that company, and thus you own a portion of those profits. this is known as EPS, or earnings per share. so if the company earns more, your share of those earnings is worth more. conversely, if a company makes less, then the shares are worth less.\n\nhowever the relationship is a bit more complicated in practice. what makes the market frustrating yet beautiful at the same time is that human emotion is involved. you have analysts and ceo's making predictions as to how much the company will earn. often these predictions are overblown, so if the company does well, but not quite as well as the liberal predictions, then you have a lot of people overreacting to the news and perhaps selling the stock, driving its price down. this is often a great time to buy, because there are no fundamental problems with the company, and yet there is an artificial depression in the price. after a few weeks or months, people will forget about the predictions and see that the company is healthy and going strong, and the price will rise to a normal level again.\n\nyou also have situations when earnings will be very high, even outdoing expectations, but the company will issue a negative future outlook, so investors will get scared and sell, even though the earnings for that quarter or year were great.\n\nalso as you noted, sometimes investors will sell after a long run-up, taking their profits. this causes a small drop in share price. this can also be seen as a natural market correction to a stock price that has gone up faster than a company's performance, and falls back into line.\n\nthen there are completely unrelated situations like 9/11, the war in iraq, hurricane katrina, etc, that may have little or no direct impact on the company and its earnings, but drive the market lower or higher. look at how market prices reacted after 9/11 (huge drop). or after the US went to war in iraq (steady rise).\n\nover the long run, I would argue that markets are efficient, meaning that if a company is profitable and does well, the stock price will rise, and if it does poorly, the stock will will fall.\n\nover the short term, prices are impacted by the things I noted above, as well as others, that have little to do with a company's long-term performance. these irregularities in price should be seen as possible buy opportunities, if you feel the stock has become undervalued. it is these inefficiencies in the market that allow an intelligent investor to reap big profits.
1124623
The statement of retained earnings shows the changes in the retained earnings account for the accounting period from operating profits, operating losses, dividends, etc.  It's related to the balance sheet because retained earnings is a balance sheet item.  It's related to the income statement because profits/losses will change the retained earnings account.  Any cash transactions in the retained earnings account will be shown on the cash flows statement.  Hope I didn't miss any!
796877
The person who held that stock was paid $5,000.  But the fellow who bought it lost $4,000 overnite.  So to answer your question, you could say that the original holder has his money.
47310
You're correct.  Presumably you received a 1099-DIV with $8000 (or whatever) in the cap gains distribution.  You would need to include that amount in your return.  When you sell the shares, that amount will be included in your basis so your eventual gain will be total sales price-$108,000.
334415
I really doubt it.  No company has that much cash on hand to waste.  The 1B is probably referring to the increase in the value of some stock options, which might or might not be a big deal depending on the structure of the company.  If he founded the company and kept a big part of the company's stock over the years, what's the big deal?  No one complains that Warren Buffett's "annual incomes" (really unrealized gains but that's going to be the same as the CEO here) have totaled 40+ billion over the years?
428345
Do you mean preferred shares? The difference is the dividends on preferreds must be paid before any dividend on commons.
260138
Because most times, the additional shares are not issued all at the same time.  They could be issued in varying lot sizes to offset a major drop in the share price should the issuance of all the additional shares offered.  Adding the number of shares via dilution reduces the value of existing shareholders, ultimately.  Here's a link to tell you more....
605062
There are numerous ways to do cost basis.  The way that you are referrring to is the FIFO method, which is fine.  You might pay a bit more if the stock went up since your cost basis for the original shares is lower, but this would be offset by the long-term treatment.\n\nAs long as you keep track of which shares went where with the dates and the rest of the documentation, you're free to use that method.
1125788
It is perfecly fine.  For wash sale implications, it prevents you from holding shares in a specific stock while claiming a tax loss for that stock in a 30 day period.\n\nFor example:  if I had a large gain in GOOG (and I didn't want to pay taxes on it) but I had a large loss in AMTD (but didnt want to sell it because I thought it was a value) I could sell the AMTD, and buy it back, claiming the loss on the first sell against my gain on the GOOG stock.\n\nSame for short selling except if the stock price goes up you claim the loss.
538720
Income statements contains information about your revenue and your expenses. When you reduce your revenue with your expenses, you'll get profit or loss. \n\nBalance sheets contains information about your assets, liabilities and capital. Your profits or loss value from the income statement will be incorporated in your capital calculation and make your capital either increasing (profit) or decreasing (loss).\n\nRetained earnings statement is generally used for accounting in corporations, where the owner is more than one. Because the owner is more than one, your income statement value has to be divided for each owner at the last month of your accounting period. To make it not confused with your current income statement which will keep changing at time to time, your income statement value at the last month of the period is transferred to the retained earnings statement.\n\nThe statement of cash flows will calculate the difference between your cash in and cash out. The difference will be considered as the amount of your available cash right now (either in your bank or in your pocket). It will be included in your balance sheets calculation as assets.
585332
In a multi-firm oligopoly (one of the few situations where it would matter), yes, this is the case.  Then the firms can both charge the higher price and make more profit as the expense of the consumer.