A company whose stock is selling for $45 has the following balance sheet: Assets $32,000 Liabilities...
A company whose stock is selling for $45 has the following balance sheet: Assets $32,000 Liabilities $10,000 Common stock 6,000 ($6 par; 1,000 shares issued) Additional paid-in 2,000 capital Retained earnings 14,000 a. Construct a new balance sheet showing a 3 for 1 stock split. What is the new price for the stock? b. What would be the balance sheet if the firm paid a 10 percent stock dividend (instead of the stock split)?
Homework Answers
| Requirement a | ||||
| New balance sheet after a 3 for 1 Split: | ||||
| $ | $ | |||
| Assets | 32000 | Liabilities | 10000 | |
| Common stock ($2 par; 3000 shares outstanding) | 6000 | |||
| Additional Paid in Capital | 2000 | |||
| Retained Earnings | 14000 | |||
| 32000 | 32000 | |||
| In stock spilt, there is only change in number of shares and par value | ||||
| New number of Shares outstanding = 1000 X 3 = 3000 shares | ||||
| New par value per share = $6/3 = $2 par value per share | ||||
| Requirement b | ||||
| New balance sheet after the 10 percent stock dividend: | ||||
| $ | $ | |||
| Assets | 32000 | Liabilities | 10000 | |
| Common stock ($6 par; 1100 shares outstanding) | 6600 | |||
| Additional Paid in Capital | 5900 | |||
| Retained Earnings | 9500 | |||
| 32000 | 32000 | |||
| Sotck dividend shares = 1000*10% = 100 Shares | ||||
| New number of common stock shares outstanding = 1000+100 = 1,100 Shares with $6 par value. So common stock is increased by $600 to $6,600 | ||||
| Market value of stock = 100 X 45 = $4,500 | ||||
| Retained earned are reduced from $14,000 to $9,500 | ||||
| Since, Retained earnings are reduced by $4,500 and common stock is increased by $600. So balance $ 3,900 Increase in Additional paid in capital | ||||
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