If a firm has retained earnings of $2.2 million, a common shares account of $4.2

Question

If a firm has retained earnings of $2.2 million, a common shares account of $4.2 million, and additional paid in capital of $8.4 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to book value of equity (Enter your answers in dollars not in millions. Input all amounts as positive values. Indicate the direction of the effect by selecting "increase" , "decrease" and "no change" from the dropdown menu.) Retained earnings decrease Common stock to $ lto $ to$ increase Additional paid-in capital increase Hints References eBook & Resources Hint#1 Hint #2 Hint#3 Hint#4 Hint#5

Explanation / Answer

The retained earnings will decrease by 10% x $4.2m = $0.42m to $2.2m - $0.42m = $1,780,000

Common stock will increase by 10% x $4.2m = $0.42m to $4.2m + $0.42m = $4,620,000

In this case, as market value of equity and book value of equity is same, there will be no change in additional paid-in capital.

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