Since you know the par value of the common stock and the amount in dollars, you should be able to decide how many shares are outstanding. Then you calculate 10 percent to record the dividend. Remember that you have to remove from Retained Earnings the full market value of the shares issued. A dividend reduces retained earnings. A stock dividend capitalizes retained earnings, that is it reduces earned capital and increases contributed capital, thus making less retained earnings available for future cash dividends. Total capital remains the same. A stock dividend does not affect assets or liabilities.
b. A 25% stock dividend can be considered a large stock dividend which may have to be accounted as a stock split. A stock dividend accounted for as a stock split does not reduce retained earnings. It changes the par value of the shares. If you treated the 25% stock dividend the same as the small stock dividend, you would wipe out almost the entire balance retained earnings. In some cases there may not be enough retained earnings to treat a large stock dividend the same as a small one.
2. You can approach this two ways. If the company has to give up 7% of the proceeds and needs $73 million, then 73 Million = 93% of total proceeds. Solve for total proceeds and divide total proceeds by $45 to get the number of shares that have to be issued. Another approach is to reduce $45 by 7% leaving $41.85. Divide this into $73 million. Both approaches yield the same answer.
It is appropriate for you to attempt a solution and show it when you need help. Then someone can tell you where you are going wrong. It is not appropriate to assign your problem to others to solve for you.
Question 1
The owners equity accounts for Tras World International are shown here
Common Stock ($1 par value) $45,000
Capital Surplus $125,000
Retained Earnings $580,000
Total owners equity $750,000
a.
If Trans World stock currently sells for $42 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity accounts would change.
b.
If Trans World declared a 25 percent stock dividend, how would the accounts change?
Question 2
The Dunning Co. needs to raise $73 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. If the offer price is $45per share and the company’s underwriters charge a spread of 7 percent, how many shares need to be sold?
Thank you very much