a)
Identify the par per share of the
a)
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 per share of the preferred stock.
Therefore, the par value of the preferred stock is $20 per share.
b)
Calculate the dividend per share on the preferred stock.
b)
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.
Therefore, the dividend per share on the preferred stock is $1.20 per share.
c)
Compute the number of common stock shares outstanding.
c)
Explanation of Solution
Compute the number of common stock shares outstanding:
Particulars | Shares |
Common stock issued | 100,000 shares |
Less: | (1,000 shares) |
Common stock outstanding | 99,000 shares |
Table (1)
Therefore, common stock shares outstanding are 99,000 shares.
d)
Identify the average issue price per share of the common stock.
d)
Explanation of Solution
Common stock:
These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation. The dividend payments are not guaranteed and are paid after the payment made to the preferred stockholders.
Identify the average issue price per share of the common stock.
Therefore, the average issue price per share of the common stock is $15 per share.
Working Note:
(1) Calculate the value of common stock.
e)
Explain the difference between the average issue price and the market price of the common stock.
e)
Explanation of Solution
The average price per share of a common stock is $15 and the market price of the common stock per share is $42. The reasons for such difference are that the investors of the company are anticipating above average performance in the coming future and improvement of economic conditions in the market which will lead to rise in the market price of the common stock.
f)
Identify the number of shares that will be outstanding after the stock split, calculate the amount that will be transferred from the
f)
Explanation of Solution
Identify the number of shares that will be outstanding after the stock split:
Therefore, 198,000 shares will be outstanding after the stock split.
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:
Therefore, the market price of the common stock immediately after the stock split is $21.
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