CT15.1. The Shepersky Corporation was authorized to issue 2,000,000 shares of $0

Question

CT15.1. The Shepersky Corporation was authorized to issue 2,000,000 shares of $0.01 par value common stock and 200,000 shares of $50 par value, 10 percent preferred stock. To date, Shepersky has issued 600,000 shares of common stock and no preferred stock. Shepersky is contemplating the acquisition of a new piece of equipment and wants to issue stock to raise the $200,000 cash to finance its acquisition. The company is trying to decide whether to issue 10,000 shares of common stock or 4,000 shares of preferred stock. LO1 Required:
• A. Describe how the issue of each type of stock would affect the stockholders' equity of Shepersky Corporation.
• B. If Shepersky generates about $3,600,000 of net income each year and the new machine can generate an additional $40,000 of after-tax income, how will the earnings of the common shareholders be affected if:
• 1. Preferred stock is issued?
• 2. Common stock is issued?

Explanation / Answer

A If Common Stock Issue: Equity: Shares Share Capital Already Issued 600000 6000 New issue 10000 100 Premium 199900 Total Equity: = $206000 If Prefered Stock Issue: Shares Share Capital Prefered Stock 4000 200000 Equity: Already Issued 600000 6000 Equity: = $6000 B 1 If prefered stock issued Earning Per Common stock Net income $3,600,000 Additional Income $40,000 Total Income $3,640,000 Less: Preference Dividend 10% $20,000 Income Available to Common Stockholders $3,620,000 Total Common Stock 600000 EPS = Income / Number of Common Stock = 3620000 / 600000 = $6.03 2 If Common Stock is Issued: Earning per Common Stock Net income $3,600,000 Additional Income $40,000 Total Income $3,640,000 Income Available to Common Stockholders $3,640,000 Already Issued Shares 600000 New issue Shares 10000 Total Stock 610000 EPS = Income / Number of Common Stock = 3640000 / 610000 = $5.97 B 1 If prefered stock issued Earning Per Common stock Net income $3,600,000 Additional Income $40,000 Total Income $3,640,000 Less: Preference Dividend 10% $20,000 Income Available to Common Stockholders $3,620,000 Total Common Stock 600000 EPS = Income / Number of Common Stock = 3620000 / 600000 = $6.03 2 If Common Stock is Issued: Earning per Common Stock Net income $3,600,000 Additional Income $40,000 Total Income $3,640,000 Income Available to Common Stockholders $3,640,000 Already Issued Shares 600000 New issue Shares 10000 Total Stock 610000 EPS = Income / Number of Common Stock = 3640000 / 610000 = $5.97
Thank you....    A If Common Stock Issue: Equity: Shares Share Capital Already Issued 600000 6000 New issue 10000 100 Premium 199900 Total Equity: = $206000 If Prefered Stock Issue: Shares Share Capital Prefered Stock 4000 200000 Equity: Already Issued 600000 6000 Equity: = $6000

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