Chapter 11, Problem 5E

a.

To determine

Calculate the numbers of shares preferred stock have been issued.

Explanation of Solution

Preferred stock: The stock that provides a fixed amount of return (dividend) to its stockholder before paying dividends to common stockholders is referred to preferred stock.

The numbers of shares preferred stock have been issued:

$\begin{array}{c}\begin{array}{l}\text{Numbers of shares }\\ \text{preferred stock issued}\end{array}\}=\left(\frac{\text{Amount of cumulative preferred stock}}{\text{Par value per share}}\right)\\ =\left(\frac{\text{\$15,000,000}}{\text{\$100}}\right)\\ =150,000\text{ Shares}\end{array}$

Conclusion

Therefore, the numbers of shares preferred stock issued is 150,000.

b.

To determine

Determine the total amount of the annual dividends in which preferred stockholders are entitled.

Explanation of Solution

Dividends:  This is the amount of cash distributed to stockholders by a company out its earnings, according to their proportion of shares invested in the company.

The total amount of the annual dividends:

$\begin{array}{c}\begin{array}{l}\text{Total amount of the}\\ \text{annual dividends}\end{array}\}=\left(\begin{array}{l}\text{Amount of cumulative preferred stock}\times \\ \text{Cumulative preferred stock}\text{percentage}\end{array}\right)\\ =\$15,000,000\times 7\%\\ =\$1,050,000\end{array}$

Conclusion

Therefore, the total amount of the annual dividends is $1,050,000.

c.

To determine

Calculate the average issuance price per share of common stock.

Explanation of Solution

Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation.

The average issuance price per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Average issuance price per}\\ \text{share of common stock}\end{array}\}=\left[\frac{\left(\begin{array}{l}\text{Par value of common stock +}\\ \text{ Additional pai-in capital of common stock}\end{array}\right)}{\text{Number of shares issued}}\right]\\ =\left[\frac{\left(\text{\$20,000,000 +\$44,000,000}\right)}{4,000,000}\right]\\ =\left[\frac{\$64,000,000}{4,000,000}\right]\\ =\$16\text{ price per share of common stock}\end{array}$

Conclusion

Therefore, the average issuance price per share of common stock is $16.

d.

To determine

Calculate the amount of legal capital and the amount of total paid-in capital.

Explanation of Solution

Legal capital: This value is equal to the par value of the capital stock issued. This indicates that a permanent obligation of capital by the owners of a corporation and without the legal actions it cannot be removed.

The amount of legal capital:

$\begin{array}{c}\text{Amount of legal capital=}\left(\begin{array}{l}\text{Amount of cumulative preferred stock}+\\ \text{Amount of common stock}\end{array}\right)\\ =\$15,000,000+\$20,000,000\\ =\$35,000,000\end{array}$

Paid-in capital refers to the amount paid by the investors on common stock and preferred stock issued to them. Total paid-in capital represents the total amount invested by the shareholders, which includes the par value of the stock issued plus any additional paid in capital in excess of par. Excess amount raised from the stock issuance above the par value represents paid-in capital in excess of par.

The amount of paid-in capital:

$\begin{array}{c}\text{Amount of paid-in capital=}\left(\begin{array}{l}\text{Amount of legal capital}+\\ \text{Additional paid-in capital of common stock}\end{array}\right)\\ =\$35,000,000+\$44,000,000\\ =\$79,000,000\end{array}$

Conclusion

Therefore, the amount of legal and paid-in capital is $35,000,000 and $79,000,000.

e.

To determine

Calculate the book value per share of common stock.

Explanation of Solution

Common stock:

Common stock is the instrument used by the company for raising funds from the general public, through issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.

Book value per share:

This is a financial ratio which measures the value of shareholders’ equity available per common shareholder.

Calculate the book value on common stock:

Total stockholders’ equity		$143,450,000
Less: Preferred stock at par value		(15,000,000_
Equity of common stockholders’		128,450,000
Common shares outstanding		(4,000,000)
Book value per share of common stock		$32.11

Table (1)

Working notes:

Calculate the par value of the preferred stock:

$\begin{array}{c}\text{Par value of the preferred stock = }\left(\begin{array}{l}\text{Issuance of preferred stock}\\ \times \text{Par value}\end{array}\right)\\ =\left(150,000\text{ shares}\times \$\text{100}\right)\\ =\$15,000,000\end{array}$

Calculate the book value per share of common stock.

$\begin{array}{c}\begin{array}{c}\text{Book value per }\\ \text{shareof common stock}\end{array}\}\text{ = }\left(\frac{\begin{array}{l}\text{Amount attributable to}\\ \text{ equity of common stock}\end{array}}{\begin{array}{l}\text{Number of common}\\ \text{ shares outstanding}\end{array}}\right)\\ \text{=}\left(\frac{\$128,450,000}{4,000,000\text{shares}}\right)\\ \text{=\$32}\text{.11}\end{array}$

f.

To determine

Explain is it possible to determine the fair market value per share of common stock from the stockholders’ equity section.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance of stockholders’ equity accounts as on reported date at the end of the financial year.

No, it is not possible to determine the fair market value per share of common stock from the stockholders’ equity section. Because, this changes will not affect the financial position of a corporation’s directly. Also this will not reveal in the equity section of the balance sheet.