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The year-end balance sheet of Knights, Inc., includes the following stockholders’ equity section (with certain details...

The year-end balance sheet of Knights, Inc., includes the following stockholders’ equity section (with certain details omitted). Stockholders’ equity: 10% cumulative preferred stock, $100 par value, authorized 100,000 shares $4,400,000 Common stock, $2 par value, authorized 2,000,000 shares 3,400,000 Additional paid-in capital: common stock 6,800,000 Donated capital 400,000 Retained earnings 3,160,000 Total stockholders’ equity $18,160,000 Instructions From this information, compute answers to the following questions. a. How many shares of preferred stock have been issued? b. What is the total amount of the annual dividends paid to preferred stockholders? c. How many shares of common stock are outstanding? d. What was the average issuance price per share of common stock? e. What is the amount of legal capital? f. What is the total amount of paid-in capital? g. What is the book value per share of common stock? h. Assume that retained earnings at the beginning of the year amounted to $1,200,000 and the net income for the year was $4,800,000. What was the dividend declared during the year on each share of common stock? (Hint: Net income increases retained earnings, whereas dividends decrease retained earnings.)

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Answer

a.

No. of Pref Shares = Issued Capital / Face value of Share

= $4,400,000 / 100 per share

No. of Pref Shares = 44,000 Shares

b.

Preference Dividend = $4,400,000 * 10%

Preference Dividend = $440,000

c.

Common Stock outstanding = $3,400,000 / $2 per share

Common Stock outstanding = 1,700,000 Shares

d.

Issue price = (Common Stock value + Additional Paid up capital) / No. of Common Shares

= ($3,400,000 + 6,800,000) / 1,700,000 Shares

Issue price = $6 Per Share

e.

Legal Capital = Total Shareholder Capital

Legal Capital = $18,160,000

f.

Total Paid in Capital = Total Shareholder’s Equity – Retained Earnings

= $18,160,000 – 3,160,000

Total Paid in Capital = $15,000,000

g.

Book Value = Total Shareholder’s Equity excluding Pref. Capital / No. of Shares

= ($18,160,000 – 4,400,000) / 1,700,000

Book Value = 8.094 per share

h.

Closing Retained Earnings = Opening Retained Earnings + Net Income – Dividend

Dividend = Opening Retained Earnings + Net Income - Closing Retained Earnings

= 1,200,000 + 4,800,000 – 3,160,000

Closing Retained Earnings = $2,840,000

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