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Ch 10: End-of-Chapter Problems – The Features of Stock

by | Mar 23, 2020 | Uncategorized | 0 comments

1.  Problem 10-01

eBookeBookProblem 10-01

West Wind, Inc. has 5,200,000 shares of common stock outstanding with a market value of $70 per share. Net income for the coming year is expected to be $7,300,000. What impact will a two-for-one stock split have on the earnings per share and on the price of the stock? Round the earnings per share to the nearest cent and the prices of the stock to the nearest dollar.

EPS before the split: $   
EPS after the split: $   

Price of the stock before the split: $    per share
Price of the stock after the split: $    per share

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Solution
EPS before the split: $7,300,000/5,200,000 = $1.40

EPS after the split: $7,300,000/10,400,000 = $0.70

Price of the stock before the split: $70 per share

Price of the stock after the split: $70/2 = $35 per share
Solution
Correct Response

eBookProblem 10-01

West Wind, Inc. has 5,200,000 shares of common stock outstanding with a market value of $70 per share. Net income for the coming year is expected to be $7,300,000. What impact will a two-for-one stock split have on the earnings per share and on the price of the stock? Round the earnings per share to the nearest cent and the prices of the stock to the nearest dollar.

EPS before the split: $  
EPS after the split: $  

Price of the stock before the split: $   per share
Price of the stock after the split: $   per share

2.  Problem 10-02

eBookeBookProblem 10-02

Sharon Bohnette owns 1,100 shares of Northern Chime Company. There are three seats on the board of directors up for election and Ms. Bohnette is one of the nominees. Under the traditional method of voting, how many votes may she cast for herself? Round your answer to the nearest whole number.

  votes

How many votes may she cast for herself under the cumulative method of voting? Round your answer to the nearest whole number.

  votes

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Solution
Under traditional voting: 1,100 votes may be cast for any one seat.

Under cumulative voting: 1,100 × 3 = 3,300 votes may be cast for any one seat.
Solution
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eBookProblem 10-02

Sharon Bohnette owns 1,100 shares of Northern Chime Company. There are three seats on the board of directors up for election and Ms. Bohnette is one of the nominees. Under the traditional method of voting, how many votes may she cast for herself? Round your answer to the nearest whole number.

 votes

How many votes may she cast for herself under the cumulative method of voting? Round your answer to the nearest whole number.

 votes

3.  Problem 10-03

eBookeBookProblem 10-03

Jersey Medical earns $9.00 a share, sells for $90, and pays a $4.5 per share dividend. The stock is split three for one and a $1.5 per share cash dividend is declared.

  1. What will be the new price of the stock? Round your answer to the nearest dollar.$   
  2. If the firm’s total earnings do not change, what is the payout ratio before and after the stock split? Round your answers to one decimal place.Payout ratio before the split:   %

    Payout ratio after the split:   %

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Solution
  1. New price of the stock: $90/3 = $30
  2. Payout ratio before the split: $4.5/$9 = 50.0%Payout ratio after the split and the dividend is adjusted to $1.5 a share:

    $1.5/$3 = 50.0%
Solution
Correct Response

eBookProblem 10-03

Jersey Medical earns $9.00 a share, sells for $90, and pays a $4.5 per share dividend. The stock is split three for one and a $1.5 per share cash dividend is declared.

  1. What will be the new price of the stock? Round your answer to the nearest dollar.$  
  2. If the firm’s total earnings do not change, what is the payout ratio before and after the stock split? Round your answers to one decimal place.Payout ratio before the split:  %

    Payout ratio after the split:  %

4.  Problem 10-04

eBookeBookProblem 10-04

Firm A had the following selected items on its balance sheet:

Cash $ 29,000,000
Common stock ($40 par; 2,900,000 shares outstanding) 116,000,000
Additional paid-in capital 17,400,000
Retained earnings 68,000,000

How would each of these accounts appear after:

  1. a cash dividend of $0.5 per share? Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   
  2. a 6 percent stock dividend (fair market value is $80 per share)? Use the original balance sheet from the problem statement. Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   
  3. a one-for-two reverse split? Use the original balance sheet from the problem statement. Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   

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Solution
  1. When cash dividends are declared, retained earnings are reduced and current liabilities are increased by the amount of the dividend (in this case 2,900,000 × $0.5). When the dividend is paid, cash and current liabilities are reduced by $1,450,000. The net effect is that cash becomes $27,550,000, and retained earnings decline to $66,550,000.
  2. A stock dividend does not affect a firm’s assets or liabilities. It is a recapitalization that transfers an entry from retained earnings to common stock and additional paid-in capital. In this example, the 6% stock dividend results in 174,000 shares (2,900,000 × 0.06) being issued. They have a market value of $13,920,000 (174,000 × $80), so retained earnings are reduced to $54,080,000. $6,960,000 (174,000 × $40 par value) is credited to common stock. The remaining $6,960,000 is credited to additional paid-in capital. Thus, the new entries are
    Common stock ($40 par; 3,074,000 shares outstanding) $ 122,960,000
    Additional paid-in capital 24,360,000
    Retained earnings 54,080,000
  3. A stock split does not affect the firm’s assets or liabilities. It only alters the number of shares, their par value, and the price of the stock. In this case (a 1 for 2 reverse stock split), two old shares become one new share, and the par value of the new share is doubled. The new entries are
    Common stock ($80 par; 1,450,000 shares outstanding) $ 116,000,000
Solution
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eBookProblem 10-04

Firm A had the following selected items on its balance sheet:

Cash $ 29,000,000
Common stock ($40 par; 2,900,000 shares outstanding) 116,000,000
Additional paid-in capital 17,400,000
Retained earnings 68,000,000

How would each of these accounts appear after:

  1. a cash dividend of $0.5 per share? Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  
  2. a 6 percent stock dividend (fair market value is $80 per share)? Use the original balance sheet from the problem statement. Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  
  3. a one-for-two reverse split? Use the original balance sheet from the problem statement. Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.
    Cash $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  

5.  Problem 10-05

eBookeBookProblem 10-05

Jackson Enterprises has the following capital (equity) accounts:

Common stock ($2 par; 100,000 shares outstanding) $ 200,000
Additional paid-in capital 250,000
Retained earnings 200,000

The board of directors has declared a 25 percent stock dividend on January 1 and a $0.30 cash dividend on March 1. What changes occur in the capital accounts after each transaction if the price of the stock is $5? Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.

The impact of the 25 percent stock dividend:

Common stock ($    par;   shares outstanding) $   
Additional paid-in capital $   
Retained earnings $   

The impact of the $0.30 a share cash dividend:

Common stock ($    par;   shares outstanding) $   
Additional paid-in capital $   
Retained earnings $   

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Solution
The impact of the 25 percent stock dividend:

Common stock ($2 par; 125,000 shares outstanding) $ 250,000
Additional paid-in capital 325,000
Retained earnings 75,000

25,000 new shares are issued worth $5 × 25,000 = $125,000, and retained are decreased by $125,000. $50,000 is added to common stock ($2 × 25,000) and the balance ($75,000) is added to additional paid-in capital.The impact of the $0.30 a share cash dividend:

Common stock ($2 par; 125,000 shares outstanding) $ 250,000
Additional paid-in capital 325,000
Retained earnings 37,500

The amount of the dividend ($0.30 × 125,000 = $37,500) is subtracted from retained earnings. (Notice that the number of shares increased from the original 100,000 shares to 125,000 because the stock dividend preceded the cash dividend.)
Solution
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eBookProblem 10-05

Jackson Enterprises has the following capital (equity) accounts:

Common stock ($2 par; 100,000 shares outstanding) $ 200,000
Additional paid-in capital 250,000
Retained earnings 200,000

The board of directors has declared a 25 percent stock dividend on January 1 and a $0.30 cash dividend on March 1. What changes occur in the capital accounts after each transaction if the price of the stock is $5? Round the number of shares outstanding to the nearest whole number and the other answers to the nearest dollar.

The impact of the 25 percent stock dividend:

Common stock ($   par;  shares outstanding) $  
Additional paid-in capital $  
Retained earnings $  

The impact of the $0.30 a share cash dividend:

Common stock ($   par;  shares outstanding) $  
Additional paid-in capital $  
Retained earnings $  

6.  Problem 10-06

eBookeBookProblem 10-06

A firm’s balance sheet has the following entries:

Cash $ 13,000,000
Total liabilities 26,000,000
Common stock ($4 par; 2,900,000 shares outstanding) 11,600,000
Additional paid-in capital 1,450,000
Retained earnings 50,000,000

What will be each of these balance sheet entries after:

  1. a three-for-one stock split? Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $   
    Total liabilities $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   
  2. a $1.00 per share cash dividend? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $   
    Total liabilities $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   
  3. a 15 percent stock dividend (current price of the stock is $14 per share)? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $   
    Total liabilities $   
    Common stock ($    par;   shares outstanding) $   
    Additional paid-in capital $   
    Retained earnings $   

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Solution
  1. The 3 for 1 split only alters the common stock entry:
    Common stock ($1.33 par; 8,700,000 shares outstanding) $ 11,600,000
  2. The $1.00 cash dividend reduces cash and retained earnings by 2,900,000 × $1 = $2,900,000. The new entries are
    Cash $ 10,100,000
    Retained earnings 47,100,000
  3. The 15% stock dividend results in 0.15 × 2,900,000 = 435,000 shares being issued with a value of $14 × 435,000 = $6,090,000.The new entry for common stock is
    Common stock ($4 par; 3,335,000 shares outstanding) $ 13,340,000

    Since the par value accounts for only $1,740,000 (435,000 × $4) of the reduction in retained earnings, additional paid-in capital increases by the $4,350,000. The new entry is

    Additional paid-in capital $ 5,800,000

    Retained earnings are reduced by $6,090,000, the amount of the increase in common stock plus paid-in capital. The new entry for retained earnings is

    Retained earnings $ 43,910,000
Solution
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eBookProblem 10-06

A firm’s balance sheet has the following entries:

Cash $ 13,000,000
Total liabilities 26,000,000
Common stock ($4 par; 2,900,000 shares outstanding) 11,600,000
Additional paid-in capital 1,450,000
Retained earnings 50,000,000

What will be each of these balance sheet entries after:

  1. a three-for-one stock split? Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $  
    Total liabilities $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  
  2. a $1.00 per share cash dividend? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $  
    Total liabilities $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  
  3. a 15 percent stock dividend (current price of the stock is $14 per share)? Use the original balance sheet from the problem statement. Round the par value to the nearest cent, the number of shares outstanding to the nearest whole number, and the other answers to the nearest dollar.
    Cash $  
    Total liabilities $  
    Common stock ($   par;  shares outstanding) $  
    Additional paid-in capital $  
    Retained earnings $  

7.  Problem 10-07

eBookeBookProblem 10-07

What effect will a two-for-one stock split have on the following items found on a firm’s financial statements?

  1. Earnings per share $4.44. Round your answer to the nearest cent.
    Initial amount New amount Effect
    $4.44 $     
  2. Total equity $12,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $12,000,000 $     
  3. Long-term debt $4,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $4,000,000 $     
  4. Additional paid-in capital $1,402,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $1,402,000 $     
  5. Number of shares outstanding 900,000. Round your answer to the nearest whole number.
    Initial amount New amount Effect
    900,000    
  6. Earnings $4,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $4,000,000 $     

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Solution
  1. Earnings per share decrease from $4.44 to $2.22.
  2. Total equity does not change.
  3. Long term debt does not change.
  4. Paid-in capital does not change.
  5. Number of shares increases from 900,000 to 1,800,000.
  6. Earnings do not change.
Solution
Correct Response

eBookProblem 10-07

What effect will a two-for-one stock split have on the following items found on a firm’s financial statements?

  1. Earnings per share $4.44. Round your answer to the nearest cent.
    Initial amount New amount Effect
    $4.44 $  
  2. Total equity $12,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $12,000,000 $  
  3. Long-term debt $4,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $4,000,000 $  
  4. Additional paid-in capital $1,402,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $1,402,000 $  
  5. Number of shares outstanding 900,000. Round your answer to the nearest whole number.
    Initial amount New amount Effect
    900,000
  6. Earnings $4,000,000. Round your answer to the nearest dollar.
    Initial amount New amount Effect
    $4,000,000 $  

8.  Problem 10-08

eBookeBookProblem 10-08

A firm has the following balance sheet:

Assets Liabilities and Equity
Cash $ 25,000 Accounts payable $ 25,000
Accounts receivable 152,000 Long-term debt 84,000
Inventory 75,000 Common stock ($10 par; 50,000
5,000 shares outstanding)
Plant and equipment 190,000 Additional paid-in capital 141,000
Retained earnings 142,000
$442,000 $442,000
  1. Construct a new balance sheet showing the impact of a three-for-one split. If the current market price of the stock is $58, 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: $   

  2. 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: $   

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Solution
a.
Assets Liabilities and Equity
Cash $ 25,000 Accounts payable $ 25,000
Accounts receivable 152,000 Long-term debt 84,000
Inventory 75,000 Common stock ($3.33 par; 50,000
15,000 shares outstanding)
Plant and equipment 190,000 Additional paid-in capital 141,000
Retained earnings 142,000
$442,000 $442,000

Notice that the stock split has no impact on assets and liabilities. The only entries that change are the number of shares outstanding and par value.

New price of the stock: $58/3 = $19.33
b.
Assets Liabilities and Equity
Cash $ 25,000 Accounts payable $ 25,000
Accounts receivable 152,000 Long-term debt 84,000
Inventory 75,000 Common stock ($10.00 par; 55,000
5,500 shares outstanding)
Plant and equipment 190,000 Additional paid-in capital 165,000
Retained earnings 113,000
$442,000 $442,000

500 new shares are issued with a value of $58(500) = $29,000. Retained earnings are reduced by $29,000. Common stock is increased by $10(500) = $5,000. Additional paid-in capital is increased by $29,000 – $5,000 = $24,000.

There is no impact on assets, liabilities, or total equity. (This answer uses the original balance sheet that was given at the beginning of the problem.)

New price of the stock: $58/1.1 = $52.73
Solution
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eBookProblem 10-08

A firm has the following balance sheet:

Assets Liabilities and Equity
Cash $ 25,000 Accounts payable $ 25,000
Accounts receivable 152,000 Long-term debt 84,000
Inventory 75,000 Common stock ($10 par; 50,000
5,000 shares outstanding)
Plant and equipment 190,000 Additional paid-in capital 141,000
Retained earnings 142,000
$442,000 $442,000
  1. Construct a new balance sheet showing the impact of a three-for-one split. If the current market price of the stock is $58, 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: $  

  2. 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: $  

9.  Problem 10-09

eBookeBookProblem 10-09

In Year 1, VF Corporation split its stock four for one. On the day prior to the split, the stock sold for $240.60. What is the anticipated price of the stock when the split is effective? Round your answer to the nearest cent.

$   

On the day that the split was effective, VF stock closed at $59.56. What was the change in the price of the stock? Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any.

$   

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Solution
Price of the stock before the split: $240.60

Anticipated price after the split: $240.60/4 = $60.15

Actual price after the split: $59.56

Net change for the day: $59.56 – $60.15 = -$0.59
Solution
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eBookProblem 10-09

In Year 1, VF Corporation split its stock four for one. On the day prior to the split, the stock sold for $240.60. What is the anticipated price of the stock when the split is effective? Round your answer to the nearest cent.

$  

On the day that the split was effective, VF stock closed at $59.56. What was the change in the price of the stock? Round your answer to the nearest cent. Use a minus sign to enter a negative value, if any.

$