2. A company whose stock is selling for $60 has the following balance sheet: <?x
ID: 2686427 • Letter: 2
Question
2. A company whose stock is selling for $60 has the following balance sheet:
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Assets $30,000,000 Liabilities $14,000,000
Preferred stock 1,000,000
Common stock (12 par;
100,000 shares outstanding) 1,200,000
Paid-in Capital 1,800,000
Retained earnings 12,000,000
a) Construct a new balance sheet showing the effects of a 3-for-1 stock split. What is the new price of the stock?
b) Construct a new balance sheet showing the effects of a 10 percent stock dividend. What will be the approximate new price of the stock?
Explanation / Answer
Stock price =$60 / 3 = $20
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b) Construct a new balance sheet showing the effects of a stock 10% dividend. What will be the approximate new price of the stock?
Assets $30,000,000
Liabilities $14,000,000
Preferred stock 1,000,000
Common stock 1,320,000 ($12 par 110,000 shares outstanding)
Paid in capital 2,280,000
Retained earnings 11,400,000
Common stock was $60 per share
Issued 10,000 shares with a market value of 600,000
$600,000 is subtracted from retained earnings and transferred to common stock and additional paid in capital.
The amount transferred to common stock will be 10,000 times the par value of the stock ($12 x 10,000 = 120,000). The remaining $480,000 is transferred to the additional paid in capital account. New stock price is $60(.10) = $6 $60 - $6 = $54
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