Q1. A portion of the stockholder's equity section from the balance sheet of Walland Corporation appears as follows:
Stockholders' equity:
Preferred stock, 9% cumulative, $50 par, 40,000 shares
authorized, issued, and outstanding ............................................$2,000,000
Preferred stock, 12% noncumulative, $100 par, 8,000
shares authorized, issued, and outstanding ................................... 800,000
Common stock, $5 par, 400,000 shares authorized, issued,
and outstanding ...............................................................................2,000,000
Total paid-in capital .........................................................................S4,800,000
Assume that all the stock was issued on January 1 and that no dividends were paid during the first two years of operation. During the third year. Walland Corporation paid total cash dividends of S736,000.
a. Compute the amount of cash dividends paid during the third year to each of the three classes of stock.
b. Compute the dividends paid per share during the third year for each of the three classes of stock.
c. What was the average issue price of each type of preferred stock?
Q2. Early in 2011, Herndon Industries was formed with authorization to issue 250,000 shares of $10 shares par value common stock and 30,000 shares of $100 par value commulative preferred stock. During 2011, all the preferrd stock was issued at par and 120,000 shares of common stock were sold for $16 per share. The preferred stock is entitled to a dividend equal to 10 percent of its par value before any dividends are paid on the common stock.
During its first five tears of business (2011 through 2015), the company earned income totaling $3,700,000 and paid dividends of 50 cents per share each year on the common stock outstanding.
On January 2, 2013, the company purchased 20,000 shares of its own common stock in the open market for $400,000. On January 2,2015, it reissued 10,000 shares of this treasury stock for @250,000. The remaining 10,000 were still held in treasury at December 31,2015.
Instructions:
a. Prepare the stockholders' equity section of the balance sheet for Herndon Indusmes at December 31, 2015. Include supporting schedules showing (1) your computation of any paid- in capital on treasury stock and (2) retained earnings at the balance sheet date.
b. As of December 31. compute Herndon's book value per share of common stock. (Hint: Book value per share is computed only on the shares of stock outstanding.)
c. At December 31. 2015. shares of the company's common stock were trading at S30. Explain what would have happened to the market price per share had the company split its stock 3-for-1l at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.