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Pronghorn Corp has 8,300 shares of common stock outstanding. It declares a $3 per share cash dividend on Nov 1 to stockholders of record on December 1. The dividend is paid on December 31
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Sheridan Co has had 4 years of record earnings. Due to this success, the market price of its 450,000 shares of $2 par value common stock has increased from $12 per share to $51. During this period, paid-in capital remained the same at $2,700,000. Retained earnings increased from $2,025,000 to $13,500,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split.
He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders' equity, and (c) per value per share.
(a)
1. Stock Dividend- retained earnings
2. 2-for-1 stock split - retained earnings
(b)
(c)
1. Stock dividend - par value per share
2. 2-for-1 stock split - par value per share
- (a)
- 1. (450,000 x 15% x $51)= $3,442,500
- [$13,500,000 - $3,442,500]= $10,057,500
2. The retained earnings after the stock split would be the same as it was before: $13,500,000
- (b)
| | Original Balances | After Dividend | After Split |
|---|
| Paid-in capital | 2,700,000 | 6,142,500 | 2,700,000 | | Retained Earnings | 13,500 | 10,057,500 | 13,500,000 | | Total stockholders' equity | 16,200,000 | 16,200,000 | 16,200,000 | | Shares outstanding | 450,000 | 517,500 | 900,000 |
- (c)
- 1. Stock dividend will not affect the par value per share. It remains at $2
- 2. The 2-for-1 stock split will cut the par value per share in half. It will be $1 ($2 x 1/2)
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Prepare the entries on each of the three dates that involved dividends.
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- Jun 15: (61,500 shares + 11,700 shares) x $1.90= $139,080
Dec 15: (61,500 shares + 11,700 shares + 5,200 shares) x $2.30= $180,320
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Kingbird Inc. is considering these two alternatives to finance its construction of a new $1.57 million plant:
1. Issuance of 157,000 shares of common stock at the market price of $10 per share.
2. Issuance of $1.57 million, 5% bonds at face value
Indicate which alternative is preferable.
____ is preferable.
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- Interest: ($1,570,000 x 5%)= $78,500
Earnings per share (issue stock): ($942,000/753,600)= $1.25
Earnings per share (Issue Bond): ($894,900/596,600)= $1.50
Issuance of bonds is preferable
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