At 31st of December 2019, John owned 25% of the common stock capital of a company...
At 31st of December 2019, John owned 25% of the common stock capital of a company called Empire’s Investment Ltd.
The company focuses on the local real estate market and shows increasing profits year after year.
At the beginning of the year 2020 the company presented the following Balance sheet:
assets
cash 2.005.000,00
land 200.000,00
buildings 1.200.000,00
acc depr buildings -200.000,00
real state available for sale 2.500.000,00
construction in progress 2.300.000,00
total assets 8.005.000,000
liabilities 3.250.000,00
long term note payable 1.000.000,00
acconts payable 2.250.000,00
owner equity 4.755.000,00
capital stock (4.000.000 shares with 1$ par value) 2.000.000,00
eratined earnings 2.755.000,00
total liabilities + owners equity 8.005.000,00
During the first months of the year, John heard the company made the following operations that may affect the situation of the ownership of the company:
On 24 of January the company decided a 10% stock dividend distribution to its stockholders on record at 25st of February, to be paid on 15 of March. The market value of the shares was estimated to 10€ per share on 24 of January.
On 1st of March the company purchased 200.000 of its owns shared at a price of 10€ per share
In order to invest in a new project, the company decided to increase its financing issuing on 4th of April 1,000,000 preferred stock with a €15 face value. Said preferred stock will offer a 20% cumulative dividend.
On 1st of May, the company reissued 50% of the stocks purchased on 1st of March at a price per share of € 12.
The forecast presented by the board of the company during the last stockholders meeting showed the following perspectives of net income taking into account the new projects to be carried on in 2020.
|
Empire's Investments Ltd |
||
|
Net Income forecast |
||
|
Year |
Net Income |
Div/ share |
|
2020 |
120.000,00 |
0,06 |
|
2021 |
350.000,00 |
0,18 |
|
2022 |
12.200.000,00 |
6,10 |
|
Total |
12.670.000,00 |
6,34 |
|
Average / Year |
2,11 |
|
John, who is a conservative investor, is worried about the different movements in the stockholders equity section of the company registered during the first months of the year and asks you how the different operations described below may affect his investment into the company.
In particular, John would like to know the following:
- What are the journal entries to be made by the company to register all the operations mentioned below (40 points) (ALREADY DONE)
- Calculate the amount of cash dividend payment for preferred stock to be expected at the end of the years 2020, 2021 and 202 ? Justify your answers and calculations. (10 points)
- Assuming the forecast prepared by the directors of the company is correct regarding the net income, would the cash dividends to be expected remain the same taking into account the different movements described below? Calculate the amount of cash dividend payment per share of common stock to be expected at the end of the years 2020, 2021 and 2022. ? Justify your answers and calculations. (25 points)
- Instead of issuing preferred stock on 4th of April, the company had the possibility to issues 15,000 of 8% Bonds of €1,000 face value. Calculate the earning per share of common stock considering the company would have issued the bond instead of the preferred stock (explain your calculation). Do you agree with the board of Directors choice for the preferred stocks? (Justify your answer). (25 points)
JUST NEED QUESTION 3 AND 4, 1 AND 2 ARE ALREADY DONE!
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