Problem 8-23 Analyzing the stockholders equity section of the balance sheet LO 8
ID: 2424945 • Letter: P
Question
Problem 8-23 Analyzing the stockholders equity section of the balance sheet LO 8-4, 8-7
The stockholders’ equity section of the balance sheet for Gator Company at December 31, 2014, is as follows:
Stockholders’ Equity
Paid-in capital
Preferred stock, ? par value, 6% cumulative,
250,000 shares authorized, 55,000 shares issued
and outstanding $ 550,000
Common stock, $20 stated value, 300,000 shares
authorized, 55,000 shares issued and ? outstanding 1,100,000
Paid-in capital in excess of par—Preferred 45,000
Paid-in capital in excess of stated value—Common 165,000
Total paid-in capital 1,860,000
Retained earnings 400,000
Treasury stock, 8,000 shares (40,000 )
Total stockholders’ equity $ 2,220,000
Note: The market value per share of the common stock is $40, and the market value per share of the preferred stock is $27.
Required
a. What is the par value per share of the preferred stock?
b. What is the dividend per share on the preferred stock? (Round your answer to 2 decimal places.)
c. What is the number of common stock shares outstanding?
d.
What was the average issue price per share (price for which the stock was issued) of the common stock? (Round your answer to 2 decimal places.)
f.
If Gator declared a 2-for-1 stock split on the common stock, how many shares would be outstanding after the split? What amount would be transferred from the Retained Earnings account because of the stock split? Theoretically, what would be the market price of the common stock immediately after the stock split?
Explanation / Answer
ANSWER A:- par value per share of the preferred stock = $ outstanding/ shares issued= $ 550000/55000 = $ 10
ANSWER B:- dividend per share on the preferred stock = par value * dividend %= $10 * 6% = $ 0.60
ANSWER C:- number of common stock shares outstanding = common stock - treasury stock= 55000- 8000= 47000
ANSWER D:- average issue price per share (price for which the stock was issued) of the common stock=
(Common Stock Outstanding + Paid in Excess of stated value-Common) / common stock share issued
= (1100000 + 165000) / 55000 = $23
ANSWER F :-
1) If Gator declared a 2-for-1 stock split on the common stock, how many shares would be outstanding after the split?
47000*2 = shares outstanding (47000 from answer C)
2) What amount would be transferred from the Retained Earnings account because of the stock split?
A stock split does not affect the Retained earnings of the Company because under a stock split the number of shares increases but the market capitalisation remains the same and there is no dilution of value i.e. existing shares split but the underlying value remains same.
3) what would be the market price of the common stock immediately after the stock split?
With 2:1 stock split, the number of shares has doubled , therefore market price would be reduced to half
=$40/2 = $ 20