Chapter 11, Problem 6PA

a.

To determine

Calculate the number of shares of common stock issued.

Explanation of Solution

The number of shares of common stock issued:

$\begin{array}{c}\begin{array}{l}\text{Number of shares of}\\ \text{common stock issued }\end{array}\}\text{=}\left(\frac{\text{ Par value of all common stock outstanding}}{\text{Par value per share of common stock}}\right)\\ =\left(\frac{\text{ \$6,819}}{\text{\$0}\text{.50}}\right)\\ =13,638\end{array}$

Conclusion

Therefore, the number of shares of common stock issued is 13,638.

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:

$\begin{array}{c}\begin{array}{l}\text{Total amount of the annual dividends}\\ \text{paid to preferred stockholders}\end{array}\}=\left(\begin{array}{l}\text{Number of shares of}\\ \text{ preferred stock outstanding }\\ \times \text{Dividend requirement}\\ \text{ per share of preferred stock}\end{array}\right)\\ =\left(345\times \$17.20\right)\\ =\$5,934\end{array}$

Conclusion

Therefore, the total amount of the annual dividends paid to preferred stockholders is $5,934.

c.

To determine

Calculate the total amount of paid-in capital.

Explanation of Solution

The total amount of paid-in capital:

$\begin{array}{c}\text{Total amount of paid-in capital=}\left(\begin{array}{l}\text{Par value of preferred stock }\\ \text{+Par value of common stock}\\ \text{+ Additional paid-in capital}\\ \text{ of common stock }\end{array}\right)\\ =\left(\$86,250+\$6,819+87,260\right)\\ =\$180,329\end{array}$

Conclusion

Therefore, the total amount of paid-in capital is $180,329.

d.

To determine

Calculate the book value per share of common stock.

Explanation of Solution

The book value per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}=\left(\frac{\text{Equity of common stockholders}}{\begin{array}{c}\text{Number of shares of }\\ \text{common stock outstanding}\end{array}}\right)\\ =\left(\frac{\text{\$151,342}}{13,638}\right)\\ =\$11.10\end{array}$

Working notes:

Calculate the par value of preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Par value of }\\ \text{preferred stock}\end{array}\}\text{= }\left(\begin{array}{l}\text{Number of preferred stock issued }\times \\ \text{Par value per share}\end{array}\right)\\ =\left(345\times \$250\right)\\ =\$86,250\end{array}$

Calculate the amount of equity of common stockholders:

$\begin{array}{c}\text{Equity of common stockholders = }\left(\begin{array}{l}\text{Total stockholders' equity}-\\ \text{ Par value of preferred stock}\end{array}\right)\\ =\left(\$237,592-\$86,250\right)\\ =\$151,342\end{array}$

Conclusion

Therefore, the book value per share of common stock is $11.10.

e.

To determine

Explain the advantages and disadvantages to P of being publicly owned rather than operating as a closely held corporation.

Explanation of Solution

Publicly owned corporations:

Publicly owned corporations are those companies whose shares are listed on a stock exchange. Moreover, these companies have huge responsibilities to release the quarterly and annual information to the stockholders of the company and publish annual reports to the public. The certified public accountants (CPAs) audit the financial statements of the publicly owned corporations.

Closely held corporation:

A corporation that has less number of shareholders and will not be traded frequently on the stock exchange is referred to as closely held corporation. Such corporations are mostly held by family members, and the family members hold the majority stock of the company.

Advantages and disadvantages to P of being publicly owned rather than operating as a closely held corporation:

• The primary advantage of being publicly owned is that the corporation has the chance to raise a huge amount of equity capital from the investors.
• Some of the publicly owned corporation have millions of stockholders’, which consists of pension funds, mutual funds, and other corporations, whereas for closely held corporations, it is difficult to rise a huge amount of equity capital that is available to publicly owned corporations.
• Equity investments in publicly owned corporation are highly liquid assets, and these assets are sold quickly at estimated market prices.
• The major disadvantage of being publicly owned corporations are an increase in governmental rules and regulation for reporting the financial statements.

f.

To determine

Explain the meaning of convertible preferred stock.

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 as preferred stock.

The convertible preferred stocks has convertible feature. Because of this feature, preferred stock can convert into common stock at a particular conversion rate.

Convertible feature of preferred stock: This feature allows preferred shareholder to exchange preferred shares for common shares at predetermined conversion ratio.

The convertible preferred stock has convertible feature. Because of this feature, preferred stock can be convertible into common stock or bonds at a particular conversion rate. In the same manner, some debtors also will be given the rights to convert their debt to corporate stocks.

g.

To determine

Determine the given preferred stock provide a higher or lower dividend yield.

Explanation of Solution

Dividend yield ratio indicates how much percentage of share prices a company pays out in the form of dividends price. The formula to calculate the dividend yield percentage is as follows:

Calculate the dividend yield:

$\begin{array}{c}\text{Dividend yield =}\left[\frac{\left(\begin{array}{l}\text{Preferred stock percentage}\\ \times \text{ Par value of preferred stock }\end{array}\right)}{\text{Market price per share}}\right]\\ \text{=}\left[\frac{\left(\text{8\%}\times \text{ \$50 }\right)}{\text{\$57}}\right]\\ =\left(\frac{\$4}{\$57}\right)\\ =.07\%\text{or 7\%}\end{array}$