Chapter 8, Problem 25P

a)

To determine

Identify the par 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 per share of the preferred stock.

$\begin{array}{c}\begin{array}{l}\text{Par per share of the}\\ \text{ preferred stock}\end{array}\}\text{ =}\frac{\text{Value of preferred stock}}{\text{Number of shares issued and outstanding}}\\ =\frac{\$200,000}{10,000}\\ =\$20\end{array}$

Therefore, the par value of the preferred stock is $20 per share.

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.

$\begin{array}{c}\begin{array}{l}\text{Dividend per share on the}\\ \text{ preferred stock}\end{array}\}\text{ = Par per share of the preferred stock }\times \text{ Dividend percent}\\ \text{=\$20}\times \text{6\%}\\ \text{=\$1}\text{.20 per share}\end{array}$

Therefore, the dividend per share on the preferred stock is $1.20 per share.

c)

To determine

Compute the number of common stock shares outstanding.

Explanation of Solution

Compute the number of common stock shares outstanding:

Particulars	Shares
Common stock issued	100,000 shares
Less: Treasury stock	(1,000 shares)
Common stock outstanding	99,000 shares

Table (1)

Therefore, common stock shares outstanding are 99,000 shares.

d)

To determine

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

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.

$\begin{array}{c}\begin{array}{l}\text{Average issue price per share }\\ \text{of the common stock}\end{array}\}\text{ =}\frac{\text{Value of common stock (1)}}{\text{Number of shares issued}}\\ =\frac{\$1,500,000}{100,000}\\ \text{=\$15 per share}\end{array}$

Therefore, the average issue price per share of the common stock is $15 per share.

Working Note:

(1) Calculate the value of common stock.

$\begin{array}{c}\text{Value of common stock =}\left(\begin{array}{l}\text{Value of the shares issued}\\ \text{ and outstanding}\end{array}\right)\text{+}\left(\begin{array}{l}\text{Paid-in-capital in excess of }\\ \text{stated value-common stock}\end{array}\right)\\ =\$1,000,000+\$500,000\\ =\$1,500,000\end{array}$

e)

To determine

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

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)

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:

$\begin{array}{c}\text{Shares outstanding after stock split= }\left(\text{Number of shares outstanding }\right)\times \text{Stock split}\left(\text{2-for-1}\right)\\ =99\text{,000 shares × 2}\\ \text{=198,000 shares}\end{array}$

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:

$\begin{array}{c}\begin{array}{l}\text{Market price of the common }\\ \text{stock after stock split}\end{array}\}\text{ =}\frac{\text{ Market price of common stock}}{\text{Stock split}\left(\text{2-for-1}\right)}\\ =\frac{\$42}{2}\\ =\$21\end{array}$

Therefore, the market price of the common stock immediately after the stock split is $21.