Kosco CD Company has had 4 years of record earnings. Due to this success, the ma

Question

Kosco CD Company has had 4 years of record earnings. Due to this success, the market price of its 400,000 shares of $2 par value common stock has increased from $6 per share to $50. During this period, paid-in capital remained the same at $2,400,000. Retained earnings increased from $1,800,000 to $12,000,000. CEO Al Dryer is considering either (1) a 15% stock dividend or (2) a 2-for-l stock split. He asks you to show the before-and-after effects of each option on retained earnings and total stockholders' equity.

Explanation / Answer

Solution:

  Particulars Original Balance After Dividend After Split Paid-inCapital 2,00,000 3,60,000 4,00,000 Retained Earnings 12,00,000 9,00,000 12,00,000 Total Stock holder's Equity 14,00,000 12,60,000 16,00,000 Outstanding Shares 4,00,000 4,60,000 8,00,000

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