Question

Problems: Set B Compare impact of cash dividend, stock dividend, and stock split. (LO 1) AP P14-IB The condensed balance sheet of Erickson Corporation reports the following: ERICKSON CORPORATION Balance Sheet (partial) January 31, 2017 S9,000,000 Total assets Liabilitics and shareholders equity Liabilitics Shareholders' equity Common shares, unlimited number authorized, 500,000 issued Retained carnings $2,500,000 $3,000,000 3,500,000 6,500,000 $9,000,000 Tatal liabilities and shareholders' equity The market price of the common shares is currently $30 per share. Erickson wants to assess the impact ef three possible alternatives on the corporation and its shareholders. The alternatives are 1. Payment of a $1.50 per share cash dividend 2. Distribution of a 5% stock dividend 3. A 2-for-1 stock split Instructions (a) For each alternative, determine the impact on (1) assets, (2) liabilities, (3) common shares, (4) retained earnings, (5) total shareholders' equity, and (6) the number of shares. (b) Assume an Erickson shareholder currently owns 2,000 common shares at a cost of $50,000. What is the impact of each alternative for the sharcholder, assuming that the market price of the shares changes proportionately with the alternative?

Answer 1

PART A

1. Payment of dividend of $ 1.50 per share on 500000 shares = $ 750,000 will lead to reduction in assets and retained earnings. No change in others.

2. Payment of 5% stock dividend that is (5% of $ 30 per share i.e market price )* 500,000 share = $ 750,000 will lead to reduction in retained earnings and increase in shareholder's equity by $ 750,000. Number of shares will also go up by 125,000 shares.

3. In a stock split, there would be effect on only number of shares which will go up from 500,000 to 1,000,000

Part B

1. Share current market value = 2000 x $ 30 = $ 60,000

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Dividend = 2000 x 1.50 = $ 3000

Thus shareholder wealth would be 60000+3000 = $ 63000

2. Share current market value = 2000 x $ 30 = $ 60,000 after options = 60000*1.50 = $ 90,000

3. Stock split will not lead to change in wealth.