Riff CD Company has had 4 years of record earnings. Due to this success, the mar

Question

Riff CD Company has had 4 years of record earnings.

Due to this success, the market price of its 400,000 shares of $3 par value common stock has increased from $12 per share to $51.

During this period, paid-in capital remained the same at $2,400,000. Retained earnings increased from $1,800,000 to $12,000,000.

CEO Josh Borke is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split.

He asks you to show the before-and-after effects of each option on (a) retained earnings and (b) total stockholders' equity.

PAID-IN CAPITAL: Original Balance: ______ After dividend: _____ After Split: _____
RETAINED EARNINGS: Original Balance: _____ After dividend: _____ After Split: _____
TOTAL STOCKHOLDERS EQUITY: Originical Balance: _____ After dividend: _____ After Split: _____
SHARES OUTSTANDING: Original Balance: _____ After dividend: _____ After Split: ______

Explanation / Answer

15% stock dividend will result in 60,000 additional shares. These shares will be valued at market because it is considered a small stock dividend (< 25%). Large stock dividends are valued at par value. Stock dividends in general result in a transfer from retained earnings into paid-in capital. Paid-in Capital Original Balance: (400,000 x $3) + $2,400,000 = 3,600,000 After Dividend: (460,000 x $3) + ($2,400,000 + 60,000 x ($51 - $3)) = 6,660,000 After Split: (800,000 x $1.5) + $2,400,000 = $3,600,000 Retained Earnings Original Balance: $12,000,000 After Dividend: $12,000,000 - (60,000 x $51) = $8,940,000 After Split = $12,000,000 Total Stockholder's Equity (Paid-in Capital + Retained Earnings) Original Balance: $15,600,000 After Dividend: $6,660,000 + $8,940,000 = $15,600,000 After Split = $15,600,000 Shares Outstanding Original Balance: 400,000 After Dividend: 400,000 + 60,000 = 460,000 After Split = 400,000 x 2 = $800,000

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