Question

P14-1B The condensed balance sheet of Erickson Corporation reports the following: of cash vidend, 1) AP ERICKSON CORPORATION Balance Sheet (partial) January 31, 2017 $9,000.00 $2,500,00 Total assets Liabilities and shareholders' equity Liabilities Shareholders' equity Common shares, unlimited number authorized, 500,000 issued Retained earnings Total liabilities and shareholders' equity $3,000,000 3,500,000 1. Rea 2. Issu 3. Issu Instrud (a) Ca (b) De Re TAKIN to fulfi with sh P14-4 6,500.000 $9,000.00 The market price of the common shares is currently $30 per share. Erickson wants to assess the 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 The fol (a) For each alternative, determine the impact on (1) assets, (2) liabilities, (3) common carnings, (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 of cach alternative for the shareholder, assuming that the market price of the shares chan with the alternative? common shares (4 Jan. 1 Feb. 2 Apr. 1 June 2 Aug. 10 Oct. cost of $50,000. What is shares changes proprio TAKING IT FURTHER What is the purpose of a reverse stock split? When might -ansactions P14-2BOn December 31, 2016. Anda er equity Dec When might a company take tim

Answer 1

a.

	Assets	Liabilities	Common Shares	Retained earnings	Total shareholders' equity	No of shares
1. Payment of dividend	REDUCES BY $ 750,000	No affect	No affect	REDUCES BY $ 750,000	REDUCES BY $ 750,000	No affect
2. 5% Stock dividend	No affect	No affect	INCREASES BY $ 150,000	REDUCES BY $ 150,000	No affect	INCREASES BY 25000 SHARES
3. 2 -for - 1 split	No affect	No affect	Overall No affect. however number of shares will increase	No affect	No affect	INCREASES BY 500,000 SHARES

b. Market value before exercising below options: 2000 shares * 30 $ = 60,000 $.

• There will cash dividend received $ 1.5*2000 = $ 3000. Plus declaration may have gradual impact on the market value of shares. So, net benefit = MV of holding (30*2000) + (3000) = 63000. No increase in the number of shares
• Stock dividends do not increase the market capitalization of a company. So, market value per stock after stock dividend = (30*500,000 shares)/(500,000*105/100) = $ 28.57. Number of shares held after stock dividend = 2000*105/100 = 2100. So, 2100*28.57 = 60,000. Hence no changes in market value, but only increase in number of shares.
• 2-for-1 split: In a stock split, the market value of share also gets divided in proportion of the split ratio. so market value per share => $30*1/2 = $ 15. No of shares after split = 2,000 * 2/1 = 4000, its market value= 4000 *15 = 60,000. Hence no changes in market value, but only increase in number of shares.