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Chapter 5: Q13BP (page 598)

The Western Pipe Company has the following capital section in its balance sheet. Its stock is currently selling for \(6 per share.

Common stock (50,000 shares at \)2 par)

\(100,000

Capital in excess of par

\)100,000

Retained earnings

\(250,000

\)450,000

The firm intends to first declare a 15 percent stock dividend and then pay a 25-cent cash dividend (which also causes a reduction of retained earnings). Show the capital section of the balance sheet after the first transaction and then after the second transaction.

Short Answer

Expert verified

The balance of common stock will be $115,000 and the balance of retained earnings will be $235,625.

Step by step solution

01

Capital section after I transaction

The balance of common stock will be $115,000.

Common stock (57,500 shares at $2 par)

$115,000

Capital in excess of par

$100,000

Retained earnings

$250,000

$465,000

02

Capital section after II transaction

The balance of retained earnings will be $235,625.

Common stock (57,500 shares at $2 par)

$115,000

Capital in excess of par

$100,000

Retained earnings

$235,625

$450,625

Reduction in retained earnings=Retained earnings-Dividend=$250,000-$.25脳57,500=$250,000-$14,375=$235,625

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Most popular questions from this chapter

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

The investment banking firm of Einstein & Co. will use a dividend valuation model to appraise the shares of the Modern Physics Corporation. Dividends (D1) at the end of the current year will be \(1.64. The growth rate (g) is 8 percent and the discount rate (Ke) is 13 percent.

a. What should be the price of the stock to the public?

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c. If the issuing corporation requires a net price of \)31.30 (proceeds to the corporation) and there is a 7 percent underwriting spread, what should be the price of the stock to the public? (Round to two places to the right of the decimal point.)

What is a key tax characteristic associated with state and local (municipal) securities?

Question: I. B. Michaels has a chance to participate in a new public offering by Hi-Tech Micro Computers. His broker informs him that demand for the 700,000 shares to be issued is very strong. His broker鈥檚 firm is assigned 25,000 shares in the distribution and will allow Michaels, a relatively good customer, 1.3 percent of its 25,000 share allocation. The initial offering price is \(30 per share. There is a strong aftermarket, and the stock goes to \)32 one week after issue. The first full month after issue, Mr. Michaels is pleased to observe his shares are selling for \(33.50. He is content to place his shares in a lockbox and eventually use their anticipated increased value to help send his son to college many years in the future. However, one year after the distribution, he looks up the shares in The Wall Street Journal and finds they are trading at \)28.50.

c. Why might a new public issue be expected to have a strong aftermarket?

A financial analyst is attempting to assess the future dividend policy of Environmental Systems by examining its life cycle. She anticipates no payout of earnings in the form of cash dividends during the development stage (I). During the growth stage (II), she anticipates 12 percent of earnings will be distributed as dividends. As the firm progresses to the expansion stage (III), the payout ratio will go up to 35 percent and will eventually reach 58 percent during the maturity stage (IV).

a Assuming earnings per share will be as follows during each of the four stages, indicate the cash dividend per share (if any) during each stage.

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\)1.80

Stage III

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Stage IV

\)3.70

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