Question

1) Bill issued 200,000 shares of $2 par value stock. The book value of Bill’s common stockholders' equity is equal to $20 million. On August 1, he implements a two-for-one stock split. After the stock split, the total number of shares outstanding is 400000 shares, the total par value is $1 and the total book value is $20 million.

Assuming the market price per share of Bill’s stock was $150/share before the split, what should be the market price per share after the split?

2)On July 15, 2015, Tina declared and issued a 15 percent stock dividend. Prior to this dividend, Tina had 50,000 shares of $10 par value common stock issued and outstanding. The market value of Tina’s common stock on July 15, 2015, was $23 per share. As a result of this stock dividend, by what amount would Tina’s total stockholders' equity increase or decrease?

3) For the year, Gamma had net income of $750, interest expense of $150, and a “Times Interest Earned Ratio” of 18. What was Gamma’s income before taxes for the year?

Answer 1

1

Stock split would reduce the market value of share by the ratio of stock split

Market value after stock split

150*(1/2)

Market value after stock split

$75

2

Stock dividend would not impact shareholder's equity as retained earnings would decrease by amount of stock dividend and common stock would increase by stock dividend.

Decrease in retained earnings

$172,500

(50000*15%*23)

Increae in value of common shares

$172,500

(50000*15%*23)

Total impact on shareholder's equity

$0

3

Times interest earned ratio

Earnings before interest and taxes/Interest tax

18

EBIT/150

EBIT

18*150

EBIT

$2,700

Income before taxes

EBIT - Interest

Income before taxes

2700-150

Income before taxes

$2,550