Principals Finance Assignment 3

Ch 10: 3, 4, 5, 7; Ch 14: 4

3. Jersey mining earns $9.50 a share, sells for $90, and pays a $6 per share dividend?
The stock is split two for one and a $3 per share cash dividend is declared.
(a) What will be the new price of the stock?
New Price: $90/2 = $45
(b) If the firm total earning do not change, what is the payout ratio before and after the stock split?

Before: $6/9.50 = 63.16%
After: $3/4.75 = 63.16%

4. Firm A had the following selected items on its balance sheet:
Cash: 28,000,000
Common Stock: 100,000,000
($50 par, 2,000,000 shares outstanding)
Additional Paid Capital: 10,000,000
Retained Earnings: 62,000,000
How would each of these accounts appear after:

A. A cash dividend of $1 per share

2,000,000 *$1 = $2,000,000
Cash: 26,000,000
Common Stock: 100,000,000
($50 par, 2,000,000 shares outstanding)
Additional Paid Capital: 10,000,000
Retained Earnings: 60,000,000

B. a 5% stock dividend (fair market value is $100/share)
$2,000,000 *5%* $100 = 10,000,000
$2,000,000 *5% *$50 = 5,000,000

Cash: 28,000,000
Common Stock: 105,000,000
($50 par, 2,000,000 shares outstanding)
Additional Paid Capital: 15,000,000
Retained Earnings: 52,000,000

C. A one-for-two reverse split?
$50*2 = $100
2,000,000/2 = 1,000,000

Common Stock: 100,000,000
($100 par, 1,000,000 shares outstanding)
Additional Paid Capital: 10,000,000
Retained Earnings: 62,000,000
5. Jackson Enterprises has the following capital (equity accounts:
Common Stock $100,000
($1 par; 100,000 shares outstanding)
Additional Paid Capital 200,000
Retained Earnings 225,000
The board of directors has declared a 20% stock dividend on Jan 1 and a $.25 cash dividend on Mar 1. What changes occur in the capital accounts after each transaction if the prices of the stock is $4?

Jan 1

(20,000 *$4) = 80,000
(20,000 *$1) = 20,000

Common Stock $120,000
($1 par; 120,000 shares outstanding)
Additional Paid Capital 260,000
Retained Earnings 145,000

Mar 1

120,000*.25 = 30,000

Common Stock $120,000
($1 par;