Joanne Harper, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Joanne's opinion. She finds Barrington Corporation acceptable because the equity breakdown at year-end is as follows: Common stock, par $1 $34,600 Additional paid-in capital $66,500 Retained Earnings $210,000 The financial statement footnotes of Barrington reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 21% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $10 per share on the date the stock dividend was recorded.
Joanne Harper, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Joanne's opinion. She finds Barrington Corporation acceptable because the equity breakdown at year-end is as follows: Common stock, par $1 $34,600 Additional paid-in capital $66,500 Retained Earnings $210,000 The financial statement footnotes of Barrington reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 21% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $10 per share on the date the stock dividend was recorded.
Chapter15: Dividend Policy
Section: Chapter Questions
Problem 11P
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Transcribed Image Text:Joanne Harper, a sagacious investor, prefers the stock of a company with a higher ratio of retained
earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be
above 2.0, in Joanne's opinion. She finds Barrington Corporation acceptable because the equity
breakdown at year-end is as follows:
Common stock, par
$1
$34,600
Additional paid-in capital
$66,500
Retained Earnings
$210,000
The financial statement footnotes of Barrington reveal that the company paid a stock dividend on
the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 21% of
the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that
the stock price was $10 per share on the date the stock dividend was recorded.
a. Calculate the ratio that Joanne Harper is interested in, using the year-end numbers above.
b. Prepare the shareholders’ equity for Barrington showing the balances immediately before the
company recorded the large stock dividend. Recalculate the ratio that Joanne Harper is
interested in, using the numbers before the stock dividend.
Did Barrington Corporation account for the dividend properly as a large stock dividend?
d. Prepare a pro forma statement of shareholders' equity treating the stock dividend as a small
stock dividend. Recalculate the ratio that Joanne Harper is interested in, using these pro forma
numbers.
с.
What advice would you give Joanne Harper?
е.
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