Chapter 8, Problem 23P

a)

To determine

Identify the par value per share of the 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 to as preferred stock.

Identify the par value per share of the preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Par value per share of the}\\ \text{ preferred stock}\end{array}\}\text{ =}\frac{\text{Value of preferred stock}}{\text{Number of shares issued and outstanding}}\\ =\frac{\$400,000}{40,000}\\ =\$10\end{array}$

Therefore, the par value per share of the preferred stock is $10.

b)

To determine

Calculate the dividend per share on the preferred stock.

Explanation of Solution

Dividends: Dividends are the rewards to the stockholders for investing their money in the company. Payment of dividend depends upon the decision of the management.

Calculate the dividend per share on the preferred stock:

$\begin{array}{c}\begin{array}{l}\text{Dividend per share of the}\\ \text{ preferred stock}\end{array}\}\text{ = Par per share of the preferred stock }\times \text{ Dividend percent}\\ \text{=\$10}\times 5\text{\%}\\ \text{=\$0}\text{.50 per share}\end{array}$

Therefore, the dividend per share on the preferred stock is $0.50 per share.

c)

To determine

Identify the number of common stock shares outstanding.

Explanation of Solution

Common stock: Common stock is the cash raised by the company by 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.

Calculate the number of common stock shares outstanding:

$\begin{array}{c}\text{Number of common shares outstanding = Shares issued}-\text{Treasury stock}\\ \text{=40,000}-2,000\\ \text{=38,000 shares}\end{array}$

Therefore, the number of common stock shares outstanding is 38,000.

d)

To determine

Identify the average issue price of the common stock.

Explanation of Solution

Common stock: Common stock is the cash raised by the company by 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.

Identify the average issue price per share of the common stock:

$\begin{array}{c}\begin{array}{l}\text{Average issue price per share }\\ \text{of the common stock}\end{array}\}\text{ =}\frac{\text{Value of common stock (1)}}{\text{Number of shares issued}}\\ =\frac{\$900,000}{40,000}\\ \text{=\$22}\text{.50 per share}\end{array}$

Therefore, the average issue price per share of the common stock is $22.50 per share.

Working Note 1: Calculate the value of common stock.

$\begin{array}{c}\text{Value of common stock =}\left(\begin{array}{l}\text{Value of shares issued}\\ \text{ and outstanding}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Paid-in-capital in excess of }\\ \text{stated value-common stock}\end{array}\right)\\ =\$800,000+\$100,000\\ =\$900,000\end{array}$

e)

To determine

Explain the difference between the issue price and the market price of the common stock.

Explanation of Solution

The average issue price is less by $17.50$\left[\$40-\$22.50\right]$than the Market price of the common stock. Some of the reasons for an increase in the market price over the average issue price are:

• When the investor’s expects the company to perform better in future.
• Change in the economic situations will make the share price of the company to increase.

f)

To determine

Identify the  number of shares  that will be outstanding after the stock split, calculate the amount that will be transferred  from the retained earnings account because of the stock split and also identify the market price of the common stock immediately after the stock split.

Explanation of Solution

Identify the number of shares that will be outstanding after the stock split:

$\begin{array}{c}\text{Shares outstanding after stock split= }\left(\begin{array}{l}\text{Number of shares}\\ \text{outstanding }\end{array}\right)\times \text{Stock split}\left(\text{2-for-1}\right)\\ =38,000\text{ shares × 2}\\ \text{=76,000 shares}\end{array}$

Therefore, 76,000 shares will be outstanding after the stock split.

Working Note 2: Calculate the number of shares outstanding:

$\begin{array}{c}\text{Number of shares outstanding = Numer of shares issued -}\left(\begin{array}{l}\text{Numer of shares in }\\ \text{treasury stock}\end{array}\right)\\ \text{=40,000-2,000}\\ \text{=38,000 shares}\end{array}$

Calculate the amount that will be transferred from the retained earnings account because of the stock split:

No amount will be transferred from the retained earnings account because of the stock split.

Identify the market price of the common stock immediately after the stock split:

$\begin{array}{c}\begin{array}{l}\text{Market price of the common }\\ \text{stock after stock split}\end{array}\}\text{ =}\frac{\text{ Market price of common stock}}{\text{Stock split}\left(\text{2-for-1}\right)}\\ =\frac{\$40}{2}\\ =\$20\end{array}$

Therefore, the market price of the common stock immediately after the stock split is $20.