Question

Malea Liberty has 800,000 common stock shares outstanding. It has decided to declare a 30 percent stock dividend. The new par value is the same as the original par value, $3. Before the declared dividend, the retained earnings account was $60,000,000 and capital in excess of par was $13,600,000. The current stock price is $40 per share. Calculate the new values for the following items:

Enter values in whole dollars, not in millions.

a. Capital in excess of par	$
b. Retained earnings	$

Answer 1

Given the par value is $3

Capital in excess of par is the premium paid by investors over and above the face value of the share

Given that the premium in excess of par is $13,600,000

Given the stock dividend is 30%

Face value of the stock is $3

Given the total stock dividends is 30%

Total number of share is 8,00,000

Additional stocks as dividend will be 8,00,000 +8,00,000 *0.3 = 2,40,000

Now the current price of the stock is $40.

It is important to note that when ever a company gives dividend weather stock of cash the first thing is to adjust the retained earnings.

Here the total Amount to be adjusted to retained earnings will be 2,40,000 * 40 = 96,00,000

Now the amount that will go to the paid up share capital will be 2,40,000 * 3 = 7,20,000

And the remaining balance will go and sit in the capital in excess of par

Accordingly Capital in excess of par will increase by 96,00,000 - 7,20,000 = 88,80,000

Hence the final balance of Capital in excess of par will be 13,600,000 + 88,80,000 = $ 2,24,80,000

Retained earnings will be $60,000,000 - 96,00,000 = 5,04,00,000