University Finance: PotashCorp Financial Analysis Homework

This assignment analyzes the financial performance of PotashCorp, a leading fertilizer enterprise. The solution explores the effects of cash dividends, stock dividends, and stock splits on the company's assets, liabilities, shareholders' equity, and the number of shares outstanding. It explains how these financial instruments impact the accounting equation, retained earnings, and the distribution of stocks to shareholders. Furthermore, the assignment addresses the likely reasons behind PotashCorp's share repurchase plan, focusing on the benefits of distributing excess cash to shareholders through share buybacks, which can increase dividends and signal positive financial forecasts. The solution includes references to relevant academic research.

Running head: ACCOUNTING AND FINANCIAL MANAGEMENT
Accounts
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING AND FINANCIAL MANAGEMENT
Table of Contents
In Response to Question 1...............................................................................................................2
In Response to Question 2...............................................................................................................2
References........................................................................................................................................4

2ACCOUNTING AND FINANCIAL MANAGEMENT
In Response to Question 1
The balance sheet of the company lays out the accounting equation in the form of asset
equals liabilities plus the equity shareholders of the company, which the company have in the
financial statement of the company. Retained Earnings and Equity Capital of the company are
some of the key parts that are taken into account for the overall equity share capital of the
company.
Stock Dividends: Distribution of stocks to the shareholders of the company in the form of stocks
is known as stock dividends. On a pro rata basis the shares are awarded to the shareholders of the
company, the number of shares outstanding for the Potash Corporation increases in the form of
stock issued by the company in the form of stock dividends, but the shareholder’s equity remains
the same. The asset of the company and the liabilities of the company are not affected with the
same (Firth et al. 2016).
Cash Dividends: The cash dividend that would be paid by the Potash Corporation would reduce
the retained earnings of the company and the assets of the company in the form of reduced cash.
Both the liability side and the asset side of the company would be affected from the same.
Stock Split: In case of stock split, the par value of the share of the company in the paid up
capital is reduced by the split amount and has no material effect on the retained earnings of the
company. The stock split increases the total number of outstanding shares of the company. The
stock price of the company would be affected from the same however; the assets and liability of
the company will not see any major impacts (Kalay & Zhang, 2018).

3ACCOUNTING AND FINANCIAL MANAGEMENT
In Response to Question 2
The most likely reason for distributing the excess cash profit to the shareholders of the
company in the form of the share repurchase or buyback of shares. The tender offer made by the
company to repurchase the share of the company is usually greater than the current share price of
the company. The number of outstanding shares for the company would reduce and the
dividends that would be received by the shareholders of the company would be much greater
than the previous dividend due to the fall in outstanding share base of the company (Michaely &
Qian, 2017). The higher the profitability and the smaller is the number of shares outstanding for
the company the greater is the dividend that will be received by the shareholders of the company.
The increased profit for the company can be better utilized with share buyback as it does not give
a signalling effect in the capital market thereby making the dividend of the company report in a
sustainable manner.
It also shows that the financial forecast for the company is assumed to be much efficient
and better which is allowing the management of the company purchase outstanding shares of the
company at a premium price.

4ACCOUNTING AND FINANCIAL MANAGEMENT
References
Firth, M., Gao, J., Shen, J., & Zhang, Y. (2016). Institutional stock ownership and firms’ cash
dividend policies: Evidence from China. Journal of Banking & Finance, 65, 91-107.
Kalay, A., & Zhang, F. (2018). Vanishing stock dividends. Available at SSRN 2722115.
Michaely, R., & Qian, M. (2017). Stock liquidity and dividend policy: dividend policy changes
following an exogenous liquidity shock.