Chapter 10, Problem 64E

To determine

(a)

Introduction:

When a firm issues common stock or preferred stock to raise capital, then these are recorded in the stockholders’ equity section of the balance sheet.

To find:

Number of shares of authorized Preferred stock.

Answer to Problem 64E

100,000 shares of Preferred stock are authorized.

Explanation of Solution

Given:

Part of balance sheet that depicts the “Stockholders’ equity”.

Stockholders’ equity	Sub-total ($)	Total ($)
Preferred Stock, 100,000 shares authorized, 30,000 issued and outstanding		300,000
Common Stock, 1,000,000 shares authorized, 600,000 issued and 550,000 outstanding		1,200,000
Additional Paid-in Capital Preferred Stock Common Stock	90,000 4,800,000	4,890,000
Total Capital Stock		6,390,000
Retained Earnings		450,000
Accumulated Other comprehensive income		22,000
Less: Treasury Stock, at cost		(800,000)
Total Stockholders’ Equity		6,062,000

Preferred Stock or preferred shares are the shares that are issued to the investors who wish for specified dividend periodically. The firm has a compulsion to pay the dividend to its Preference shareholders’. Unlike common stockholders’, preference shareholders are not considered as the owners of the company and they don’t even get the right to vote (or have a say) in important decisions of the firm.

As you can see in the stockholders’ equity statement, numbers of preference shares that have been authorized by the concerned authority are 100,000 preference shares.

Authorized shares are the maximum number of shares that the firm can issue in the market in the entire lifetime of the firm.

To determine

(b)

Introduction:

When a firm issues common stock or preferred stock to raise capital, then these are recorded in the stockholders’ equity section of the balance sheet.

To find:

Number of outstanding common shares.

Answer to Problem 64E

The firm has 550,000 outstanding shares of common stock in the market.

Explanation of Solution

Given:

Part of balance sheet that depicts the “Stockholders’ equity”.

Stockholders’ equity	Sub-total ($)	Total ($)
Preferred Stock, 100,000 shares authorized, 30,000 issued and outstanding		300,000
Common Stock, 1,000,000 shares authorized, 600,000 issued and 550,000 outstanding		1,200,000
Additional Paid-in Capital Preferred Stock Common Stock	90,000 4,800,000	4,890,000
Total Capital Stock		6,390,000
Retained Earnings		450,000
Accumulated Other comprehensive income		22,000
Less: Treasury Stock, at cost		(800,000)
Total Stockholders’ Equity		6,062,000

When a company raises its finances by issuing common stock to stockholders, then the resulting amount is shown under Capital Stock section of Stockholders’ equity.

A common stock is issued by the company to raise finance using equity. These are issued to the investors (who are regarded as stockholders or shareholders, once common stock is issued to them) with no obligation to pay dividend periodically. Common stock is also referred to as common shares.

Authorized Shares are the maximum number of shares that the firm can issue to shareholders.

Issued Shares are the shares that have been issued in the market (once). Even if the company purchases its own shares from the market, they’ll still be counted as Issued Shares because they have been issued (once) in the market.

Outstanding shares are the shares that are currently held by the shareholders in the market.

To determine

(c)

Introduction:

When firm issues common stock or preferred stock to raise capital then these are recorded in the stockholders’ equity section of the balance sheet.

To calculate:

Average price of common stock issued.

Answer to Problem 64E

Average price of common stock issued is $10.

Explanation of Solution

Given:

Part of balance sheet that depicts the “Stockholders’ equity”.

Stockholders’ equity	Sub-total ($)	Total ($)
Preferred Stock, 100,000 shares authorized, 30,000 issued and outstanding		300,000
Common Stock, 1,000,000 shares authorized, 600,000 issued and 550,000 outstanding		1,200,000
Additional Paid-in Capital Preferred Stock Common Stock	90,000 4,800,000	4,890,000
Total Capital Stock		6,390,000
Retained Earnings		450,000
Accumulated Other comprehensive income		22,000
Less: Treasury Stock, at cost		(800,000)
Total Stockholders’ Equity		6,062,000

For common stock:

No. of outstanding shares (issued) = 600,000

Common stock capital = $1,200,000

Additional Paid-in Capital = $4,800,000

Capital raised by issuing common stock = Common stock capital + Additional Paid-in Capital

Capital raised by issuing common stock = $1,200,000 + $4,800,000

Capital raised by issuing common stock = $6,000,000

Average issue price = $\frac{\text{Capital raised by issuing common stock}}{\text{No}\text{. of outstanding shares}}$

Average issue price = $\frac{\$6,000,000}{600,000}$

Average issue price = $10.

To determine

(d)

Introduction:

When the firm purchases its own shares from the market, it is known as treasury stock. It is shown as a part of stockholders’ equity in the balance sheet.

To calculate:

Average price of repurchased stock.

Answer to Problem 64E

Average price of repurchased stock is $16.

Explanation of Solution

Given:

Part of balance sheet that depicts the “Stockholders’ equity”.

Stockholders’ equity	Sub-total ($)	Total ($)
Preferred Stock, 100,000 shares authorized, 30,000 issued and outstanding		300,000
Common Stock, 1,000,000 shares authorized, 600,000 issued and 550,000 outstanding		1,200,000
Additional Paid-in Capital Preferred Stock Common Stock	90,000 4,800,000	4,890,000
Total Capital Stock		6,390,000
Retained Earnings		450,000
Accumulated Other comprehensive income		22,000
Less: Treasury Stock, at cost		(800,000)
Total Stockholders’ Equity		6,062,000

Treasury Stock = $800,000

No. of issued shares = 600,000

No. of outstanding common shares = 550,000

No. of shares repurchased = No. of issued shares - No. of outstanding common shares

No. of shares repurchased = 600,000 − 550,000

No. of shares repurchased = 50,000

Average price of repurchased stock = $\frac{\text{Treasury Stock}}{\text{No}\text{. of shares repurchased}}$

Average price of repurchased stock = $\frac{\$800,000}{50,000}$

Average price of repurchased stock = $16.

To determine

(e)

Introduction:

Preferred Stock or preferred shares are the shares that are issued to the investors who wish for specified dividend periodically.

To calculate:

Dividend rate of preferred stock.

Answer to Problem 64E

Dividend rate on preferred stock is 8%.

Explanation of Solution

Given:

Part of balance sheet that depicts the “Stockholders’ equity”.

Stockholders’ equity	Sub-total ($)	Total ($)
Preferred Stock, 100,000 shares authorized, 30,000 issued and outstanding		300,000
Common Stock, 1,000,000 shares authorized, 600,000 issued and 550,000 outstanding		1,200,000
Additional Paid-in Capital Preferred Stock Common Stock	90,000 4,800,000	4,890,000
Total Capital Stock		6,390,000
Retained Earnings		450,000
Accumulated Other comprehensive income		22,000
Less: Treasury Stock, at cost		(800,000)
Total Stockholders’ Equity		6,062,000

Preferred Stock:

Preferred Stock Capital = $300,000

No. of issued and outstanding shares = 30,000

Par value of preferred stock = $\frac{\text{Preferred Stock Capital}}{\text{No}\text{. of issued and outstanding shares}}$

Par value of preferred stock = $\frac{\$300,000}{30,000}$

Par value of preferred stock = $10

Annual dividend on preferred stock = $0.80 per share

Dividend Rate = $\frac{\text{Annual dividend on preferred stock per share}}{\text{Par value of preferred stock}}$

Dividend Rate = $\frac{\$0.8}{\$10}$

Dividend Rate = 0.08 or 8%.