CT15.1. The Shepersky Corporation was authorized to issue 2,000,000 shares of $0
ID: 2713278 • Letter: C
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.
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) Effect of Issue of each type of stock
If Shepersky Issues 10000 shares then the Total shares issued by the Shepersky is to be 610000
If Shepersky Issues 4000 Preferrred stock then the Total Pr eferrred stockissued by the Shepersky is to be 4000
Issue of Common stock than the Preffered stock is more expensive
B)workings of Net earning available for Common shareholders when
1 Preferred stock is issued is $3636000/- , then Earning per share is $3636000/600000 = $6.06
2. Preferred stock is issued is $3644000/- , then Earning per share is $3644000/610000 = $5.97
Regular Net Income $3,600,000 Addition Income $40,000 $3,640,000 Less: Prefernce Dividend $4,000 10 % of $40000 Net Earning available for Shareholders $3,636,000