Question

Cullumber Company has had 4 years of record earnings. Due to this success, the market price of its 500,000 shares of $4 par value common stock has increased from $14 per share to $53. During this period, paid-in capital remained the same at $6,000,000. Retained earnings increased from $4,500,000 to $30,000,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders’ equity, and (c) par value per share.

Answer 1

stock dividend = 500000*.15=75000 shares

	Before	a 15% stock dividend	2-for-1 stock split
Number of shares after such event	500,000	500,000+ 75000=575,000	500000*2/1=1,000,000
par value	$4	$4	$ 4*1/2=$ 2 per share [gets reduced in proportion to stck split
Retained earning	30,000,000	Existing - [Number of shares issued as stock dividend* market value] 30,000,000- [75000*53=$ 3,975,000] = 26,025,000	No effect [ only shares gets double and par vvalue gets half] =30,000,000
Additional paid in capital	6,000,000	6,000,000+(75000*(53-4)] =6,000,000+(75000*49)] =9675000	6,000,000
Total stockholders equity	[500,000*4]+6,000,000+30,000,000 = 38,000,000	[575000*4]+9675000+26,025,000 =38,000,000	[1,000,000*2]+6,000,000+30,000.000 = 38,000,000