This workout asks us to show how the following transactions will impact the company's balance sheet Then calculate the number of shares outstanding used in a valuation scenario We've got four transactions to put through here and we'll put them through the balance sheet formula: Assets = Liabilities + Equity This must always balance, so we'll check it does after each transaction So the first transaction, the shareholders authorized the board to be able to issue up to 2,000 shares Well that's just a theoretical maximum, that's not going to go on our balance sheet (so we don't need to worry about that) Of which 1,000 shares are issued at a price of 10 With a par value of 2 The first thing that's going to happen, is that our cash will go up by 10,000 It'll go up by the 1,000 shares multiplied by the price of 10 Shareholders have given us that cash, great! What's going to happen on the equity side is we're going to split that 10,000 into two parts We're going to split it into common stock and APIC or additional paid in capital My common stock has gone up because of the par value If you think that issue price of 10, that issue price of 10 has been split in two It's been split into par value 2 and additional paid capital 8 So if we do the common stock first, common stock has gone up by 2 times by a 1,000 shares What about the remainder? That must be the additional paid in capital That is the remaining 8, the difference between the issue price and the par value times by a 1000 years Great! Both sides of the balance sheet formula balance, we can move on. In the second transaction, 100 shares are repurchased at a price of 15 If we're repurchasing shares, that means that's going to cost us some cash (we're gonna have to pay some cash out) And we're going to have our treasury stock being impacted here. So let's have a quick look, firstly cash goes down. Goes down by 100 times by 15, so 1,500 Next up, my treasury stock is impacted. Now this is a bit of a strange one because treasury stock we're going to say it goes down and it does. Goes down by the same 1,500 But treasury stock is always shown as a negative in the equity So you can sometimes think as the treasury stock going up but it has a negative effect on the balance sheet, your equity goes down Great! That was the second transaction, both sides balance Onto our third transaction, 200 preference shares are issued with a par value of 20 So again, cash coming into us. That's great, someone has bought some preference shares from us So cash goes up by the 200 times 20 Something else has to happen on the opposite side and that's preference shares going up We now have some preference shareholders. The same figure, the same 4,000 So we've now done three of our transactions, onto the last one A 10% dividend is announced and paid on the preference shares So I am now gonna take that cash up of 4,000 and I'm gonna multiply that by the 10% dividend So each of our preference shareholders receives 10% of the 4,000 in total So that means my cash is going to go down because I pay that out to my preference shareholders and they're going to receive 400 The other side is going to be retained earnings down My net income may have been a colossally large figure but unfortunately some of it has to be paid out as a dividend So that means the amount of net income that does come through into my retained earnings is just a little bit lower, 400 We now need to bring everything together, we now need to calculate the shares outstanding If we just remind ourselves what's happened, we've had a 1,000 shares being issued And we had 100 shares being repurchased I don't care about the preference shares, they do not impact your ordinary shares outstanding So my shares outstanding, I take the shares issued which was a 1,000 I then subtract the treasury stock of 100 and I finally get my shares outstanding of 900