Chapter 11, Problem 5PA

a.

To determine

Calculate the number of shares of preferred stock issued.

Explanation of Solution

The number of shares of preferred stock issued:

$\begin{array}{c}\begin{array}{l}\text{Number of shares of}\\ \text{preferred stock issued }\end{array}\}\text{=}\left(\frac{\text{ Par value of all preferred stock outstanding}}{\text{Par value per share of preferred stock}}\right)\\ =\left(\frac{\text{ \$2,400,000}}{\text{\$100}}\right)\\ =24,000\end{array}$

Conclusion

Therefore, the number of shares of preferred stock issued is 24,000.

b.

To determine

Determine the total amount of the annual dividends paid to preferred stockholders.

Explanation of Solution

The total amount of the annual dividends paid to preferred stockholders:

$\begin{array}{c}\begin{array}{l}\text{Total amount of the annual dividends}\\ \text{paid to preferred stockholders}\end{array}\}=\left(\begin{array}{l}\text{Number of shares of}\\ \text{ preferred stock outstanding }\\ \times \text{Dividend requirement}\\ \text{ per share of preferred stock}\end{array}\right)\\ =\left(24,000\times \$7.50\right)\\ =\$180,000\end{array}$

Working note:

Calculate the amount of dividend per share of preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend per share }\\ \text{of preferred stock }\end{array}\}\text{= }\left(\begin{array}{l}\text{Percentage of cumulative preferred stock}\\ \times \text{ Par value per share}\end{array}\right)\\ =\left(7\frac{1}{2}\%\times \$100\right)\\ =\left(0.075\times \$100\right)\\ =\$7.5\end{array}$

Conclusion

Therefore, the total amount of the annual dividends paid to preferred stockholders is $180,000.

c.

To determine

Calculate the number of shares of common stock outstanding.

Explanation of Solution

The number of shares of common stock outstanding:

$\begin{array}{c}\begin{array}{l}\text{Number of shares of }\\ \text{common stock outstanding }\end{array}\}\text{=}\left(\frac{\text{ Par value of all common stock outstanding}}{\text{Par value per share of common stock}}\right)\\ =\left(\frac{\text{ \$900,000}}{\text{\$2}}\right)\\ =450,000\end{array}$

Conclusion

Therefore, the number of shares of common stock outstanding is 450,000.

d.

To determine

Determine the average issuance price per share of common stock.

Explanation of Solution

The average issuance price per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Average issuance price per }\\ \text{share of common stock}\end{array}\}=\left(\frac{\begin{array}{l}\text{Total issuance price of }\\ \text{all common stock}\end{array}}{\begin{array}{l}\text{Number of shares of}\\ \text{ common stock issued}\end{array}}\right)\\ =\left(\frac{\text{\$9,225,000}}{450,000}\right)\\ =\$20.50\end{array}$

Working note:

Calculate the total issuance price of all common stock:

$\begin{array}{c}\begin{array}{l}\text{Total issuance price }\\ \text{of all common stock}\end{array}\}\text{= }\left(\begin{array}{l}\text{Par value of all common stock issued + }\\ \text{Paid-in capital in excess of par common stock}\end{array}\right)\\ =\left(\$900,000+\$8,325,000\right)\\ =\$9,225,000\end{array}$

Conclusion

Therefore, the average issuance price per share of common stock is $20.50.

e.

To determine

Calculate the amount of legal capital.

Explanation of Solution

The amount of legal capital:

$\begin{array}{c}\text{Amount of legal capital=}\left(\begin{array}{l}\text{Par value of preferred stock }\\ \text{+ Par value of common stock }\end{array}\right)\\ =\left(\text{\$2,400,000 + \$900,000 }\right)\\ =\$3,300,000\end{array}$

Conclusion

Therefore, the amount of legal capital is $3,300,000.

f.

To determine

Calculate the total amount of paid-in capital.

Explanation of Solution

The total amount of paid-in capital:

$\begin{array}{c}\text{Total amount of paid-in capital=}\left(\begin{array}{l}\text{Total legal capital}\\ \text{+ Additional paid-in capital}\\ \text{ of common stock }\end{array}\right)\\ =\left(\$3,300,000+\$8,325,000\right)\\ =\$11,625,000\end{array}$

Conclusion

Therefore, the total amount of paid-in capital is $11,625,000.

g.

To determine

Calculate the book value per share of common stock.

Explanation of Solution

The book value per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}=\left(\frac{\text{Equity of common stockholders}}{\begin{array}{c}\text{Number of shares of }\\ \text{common stock outstanding}\end{array}}\right)\\ =\left(\frac{\text{\$11,820,000}}{450,000}\right)\\ =\$26.27\end{array}$

Working notes:

Calculate the par value of preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Par value of }\\ \text{preferred stock}\end{array}\}\text{= }\left(\begin{array}{l}\text{Number of preferred stock issued }\times \\ \text{Par value per share}\end{array}\right)\\ =\left(24,000\times \$100\right)\\ =\$2,400,000\end{array}$

Calculate the amount of equity of common stockholders:

$\begin{array}{c}\text{Equity of common stockholders = }\left(\begin{array}{l}\text{Total stockholders' equity}-\\ \text{ Par value of preferred stock}\end{array}\right)\\ =\left(\$14,220,000-\$2,400,000\right)\\ =\$11,820,000\end{array}$

Conclusion

Therefore, the book value per share of common stock is $26.27.

h.

To determine

Calculate the dividend per share of common stock.

Explanation of Solution

The dividend per share of common stock:

$\begin{array}{c}\text{Dividend per share of common stock=}\left(\frac{\text{Total dividends on common stock}}{\text{Number of common shares outstanding}}\right)\\ =\left(\frac{\$1,912,500}{450,000}\right)\\ =\$4.25\end{array}$

Working note:

Calculate the total dividends on common stock:

Particulars	Amount ($)
Beginning balance of retained earnings	717,500
Add: Net income	3,970,000
Subtotal	4,687,500
Less: Retained earnings at the end of year	(2,595,000)
Dividends on preferred stock	(180,000)
Total dividends on common stock	$1,912,500

Table (1)

Conclusion

Therefore, the dividend per share of common stock is $4.25.