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25-A company whose stock is selling for $45 has the following balance sheet: Assets $32,000...

25-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 capital 2,000

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)?

Expert Solution

a.

After the stock split the Shareholder's equity remains the same its the price of the common shares that move proportionately to the number of shares.

3 for 1 split means: for 1 stock equity holder would have 3 stocks and price would change according to it also.

So, the new price after the stock split = current price/(split ratio) ; = 45/(3/1) ; =$15 per share

with number of outstanding share be = past number of shares*split ratio ; = 1000*(3/1) ; = 3,000 shares

the balance sheet looks exactly the same as mentioned in the question, there will be no change at all.

b.

For the stock dividend the market value of the stock will not change, but that change will be in the paid in capital as the excess to float the shares would be paid by the Addditional Paid In Capital.

Now, calculating the new number of shares being floated in the market after the stock dividend = 10%*1000 ; = 100 shares

Cumulative number of outstanding shares = 1000 +100 ; = 1,100 shares at the same market value as before the event.

Mkt value earlier = 45*1000 ; = $45,000

Therefore, New price = 45000/1100 ; = $40.91 per share

the reduction of 45-40.91 = $4.09 will be adjusted from the paid in capital. = 4.09*1100 ; = $4,500

Journal entry:-

Retained Earning

$4,500

Common Stock

Pain in capital excess of par

$600

$3,900

Therefore New Balance sheet will be:-

Assets

Equity & Liabilities

Assets $32,000

Liabilities $10,000

Common stock $6,600 ($6 par; 1,100 shares issued)

Additional paid-in capital $5,900

Retained earnings $9,500

jeff jeffy answered 1 year ago

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