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1.In the real world, we find that dividends: a) b) c) d) 2. The company with the

ID: 2802409 • Letter: 1

Question

1.In the real world, we find that dividends:

a)

b)

c)

d)

2.

The company with the common equity accounts shown here has declared a 10 percent stock dividend when the market value of its stock is $20 per share. What is the capital surplus account after the 10 percent stock dividend?

Common stock ($1 par value)

$ 406,000

Capital Surplus

1,340,000

Retained earnings

3,427,000

Total owners’ equity

$ 5,173,000

a)

b)

c)

d)

e)

a)

usually exhibit greater stability than earnings.

b)

fluctuate more widely than earnings.

c)

tend to be a lower percentage of earnings for mature firms than for newer firms.

d)

are usually set as a fixed percentage of earnings every year.

Explanation / Answer

1) d is correct. Typically, dividends are set as a percentage of earnings. Mature firms pay higher dividends than startups.

2) d is correct.

No. of outstanding shares = Common Stock / Par Value = 406,000

10% stock dividend = 10% x 406,000 = 40,600 newly issued shares which would increase capital surplus by

New shares x (Market Value - Par Value) = 40,600 x (20 - 1) = 771,400

New Capital Surplus = 771,400 + 1,340,000 = 2,111,400