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In: Accounting

Q. 01: The Klingon Fastener Company has the following shareholders’ equity account: The current market price...

Q. 01:

The Klingon Fastener Company has the following shareholders’ equity account:

The current market price of the stock is $60 per share.

  1. What will happen to this account and to the number of shares outstanding with (1) a 10 percent stock dividend? (2) a 2-for-1 stock split? (3) a 1-for-2 reverse stock split?

  2. In the absence of an informational or signaling effect, at what share price should the common stock sell after the 10 percent stock dividend? What might happen to stock price if there were a signaling effect?

Common Stock ($8 par value)

$ 2,000,000

Additional Paid-in-Capital

1,600,000

Retained Earnings

8,400,000

Total Shareholders’ Equity

$ 12,000,000

Solutions

Expert Solution

Part-A

(1). Number of shares outstanding before stock dividend= $ 2,000,000/8 = 250,000

Stock dividend = 10% of 250,000 = 25,000 shares

$ 8 x 25000 = $ 200,000 added in common stock.

$ 52 ($ 60 less $ 8)premium x 25,000 = $ 1,300,000 added in additional paid in capital

$ (8+ 52) x 25,000 = $ 1,500,000 deducted from retained earnings

No of shares outstanding after stock dividend = 275,000

Common stock ($8 par value) =$ 2,200,000

Additional paid-in capital= $ 2,900,000

Retained earnings= $ 6,900,000

Total shareholders’ equity $ 12,000,000

Number of shares outstanding =275,000

(2) Par value after split = 8 x 1/2 = $ 4

Number of shares after split = 250,000 x 2/1 = 500,000 shares

Common stock ($4 par value) = $ 2,000,000

Additional paid-in capital =$ 1,600,000

Retained earnings = $ 8,400,000

Total shareholders’ equity =$ 12,000,000

(3) Par value after split = 8 x 2/1 = $ 16

Number of shares after split = 250,000 x 1/2 =125,000 shares

Common stock ($16 par value) = $ 2,000,000

Additional paid-in capital =$ 1,600,000

Retained earnings = $ 8,400,000

Total shareholders’ equity =$ 12,000,000

Part-B

(i) In the absence of an informational or signaling effect, the common stock after the 10 percent stock dividend should be sell at market of price $ 65 .

(ii)  if there were a signaling effect, it will cause drastic price changes in stock.

ekkarill92 answered 1 year ago
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