Question

Problem 10-08

A firm has the following balance sheet:

Assets				Liabilities and Equity
Cash	$	20,000		Accounts payable	$	20,000
Accounts receivable		152,000		Long-term debt		111,000
Inventory		92,000		Common stock ($6 par;		24,000
				4,000 shares outstanding)
Plant and equipment		190,000		Additional paid-in capital		157,000
				Retained earnings		142,000
		$454,000				$454,000

a) Construct a new balance sheet showing the impact of a three-for-one split. If the current market price of the stock is $50, what is the price after the split? Round the par value and the market price after the split to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.

Assets				Liabilities and Equity
Cash		$__________		Accounts payable		$__________
Accounts receivable		$__________		Long-term debt		$__________
Inventory		$__________		Common stock ($__________   par;		$__________
				__________shares outstanding)
Plant and equipment		$__________		Additional paid-in capital		$__________
				Retained earnings		$__________
		$__________				$__________

Price of the common stock after the split: $__________  

b) Construct a new balance sheet showing the impact of a 10 percent stock dividend. After the stock dividend, what is the new price of the common stock? Use the original balance sheet from the problem statement. Round the par value and the market price after the stock dividend to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.

Assets				Liabilities and Equity
Cash		$__________		Accounts payable		$__________
Accounts receivable		$__________		Long-term debt		$__________
Inventory		$__________		Common stock ($__________   par;		$__________
				__________ shares outstanding)
Plant and equipment		$__________		Additional paid-in capital		$__________
				Retained earnings		$__________
		$__________				$__________

Price of the common stock after the stock dividend: $__________  

Answer 1

Part 1

Assets				Liabilities and Equity
Cash		$ 20,000		Accounts payable		$ 20,000
Accounts receivable		152,000		Long-term debt		111,000
Inventory		92,000		Common stock ($2 par;		24,000
				12,000 shares outstanding)
Plant and equipment		190,000		Additional paid-in capital		157,000
				Retained earnings		142,000
		$454,000				$454,000

Price of the common stock after the split: $2

Number of shares before stock split = 4000

Number of shares after stock split = 4000*3=12000

A stock split does not affect the accounts in the balance sheet. However, shares outstanding and par value per share will change.

New price after stock split = 24000/12000 = $2 per share

Part B

Part 1

Assets				Liabilities and Equity
Cash		$ 20,000		Accounts payable		$ 20,000
Accounts receivable		152,000		Long-term debt		111,000
Inventory		92,000		Common stock ($6 par;		26400
				4400 (4000+(4000*10%))shares outstanding)
Plant and equipment		190,000		Additional paid-in capital 157000 + (400*(50-6))		174600
				Retained earnings (142000-(400*50))		122,000
		$454,000				$454,000

Price of the common stock after the stock dividend: $45.45

Stock price = market value per share * total market value of share before stock dividend / total market value of share after stock dividend = 50*(50*4000)/(50*4400) = 45.45