Wallace Computer Company is a small, closely held corporation. Eighty percent of
ID: 2427492 • Letter: W
Question
Wallace Computer Company is a small, closely held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2014, was substantially as shown below.
Additional authorized common stock of $321,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of $107,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.
(c)
If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.
Explanation / Answer
No information is given with respect to the fair value of the shares. In this situation, an estimate for fair value could be developed based on market transactions involving comparable assets. Otherwise, discounted expected cash flows could be used to approximate fair value. In this closely held company, and in the absence of reliable fair value data, the book value might be used for the computation of the amount of the cash settlement.
Book value of Ms. Baker’s ordinary shares, June 30, 2014, before issuance of additional shares
(2675/26750) X $451,500
$45,150
Book value after issuance of additional shares to Derek Wallace
(2675/37450) X $558,500
$39,893
Loss in book value and amount of cash settlement
$5,257
Book value of Ms. Baker’s ordinary shares, June 30, 2014, before issuance of additional shares
(2675/26750) X $451,500
$45,150
Book value after issuance of additional shares to Derek Wallace
(2675/37450) X $558,500
$39,893
Loss in book value and amount of cash settlement
$5,257
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