Problem 1: Magic Blade's stock has risen rapidly to $50 per share. The increase is due to excitement about its new knife that uses a light beam to slice fruits and vegetables. This process enhances the final appearance and quality of salads and fruit trays.
The board of directors is considering strategies to divide the corporate ownership into more shares of stock, and bring about some reduction in the price per share. They are considering a stock split, small stock dividend, or large stock dividend. The board is unsure of the accounting effects of such transactions, and has requested information about how stockholders' equity would be impacted.
Prior to the contemplated stock transaction, equity consisted of:
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Common stock, $2 par, 2,000,000 shares authorized, 500,000 shares issued and outstanding
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$1,000,000
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Paid-in capital in excess of par
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2,000,000
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Retained earnings
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6,000,000
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Total stockholders' equity
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$9,000,000
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(a) Assuming the board were to declare a 2 for 1 split, how would the revised stockholders' equity appear?
(b) Assuming the board were to declare a 15% stock dividend, how would the revised stockholders' equity appear?
(c) Assuming the board were to declare a 50% stock dividend, how would the revised stockholders' equity appear?
(d) Prepare journal entries that would be needed (if necessary) to record the proposed transactions from part (a), (b), and (c).
Problem 2: Calculate the price earnings ratio, PEG ratio, dividend rate, and dividend payout ratio for each of the following companies. Will each ratio consistently rank the companies from "best" to "worst" performer?
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Earnings Per Share
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Dividends Per Share
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Market Price Per Share
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Average Annual Increase in Earnings
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Andrews Corporation
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$2.50
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$0.00
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$25.00
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5%
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Borger Corporation
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$1.00
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$1.00
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$18.00
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10%
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Calvert Corporation
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$5.00
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$2.50
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$20.00
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5%
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Dorchester Corporation
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$1.25
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$0.00
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$10.00
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25%
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Easton Corporation
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$2.50
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$0.75
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$50.00
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30%
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Flores Corporation
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$2.00
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$0.10
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$25.00
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20%
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Gerber Corporation
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$0.10
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$0.00
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$5.00
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10%
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Houston Corporation
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$0.50
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$0.25
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$20.00
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3%
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Problem 3: Waguespack Corporation and Hedrick Corporation had identical cash positions at the beginning and end of 20X9. Each company also reported a net income of $150,000 for 20X9. Evaluate their cash flow statements that follow. Which company is displaying elements of cash flow stress? What factors cause you to reach this conclusion? What is the importance of evaluating a company's cash flow statement?
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WAGUESPACK CORPORATION
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Statement of Cash Flows
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For the year ending December 31, 20X9
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Cash flows from operating activities:
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Net income
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$ 150,000
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Add (deduct) noncash effects on operating income
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Depreciation expense
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$ 20,000
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Gain on sale of equipment
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(185,200)
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Increase in accounts receivable
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(45,000)
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Decrease in inventory
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37,500
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Increase in accounts payable
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11,400
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Decrease in income taxes payable
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(3,000)
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(164,300)
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Net cash provided by operating activities
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$ (14,300)
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Cash flows from investing activities:
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Sale of equipment
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204,900
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Cash flows from financing activities:
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Proceeds from long-term borrowing
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20,000
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Net increase in cash
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$ 210,600
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Cash balance at January 1, 20X9
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66,000
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Cash balance at December 31, 20X9
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$ 276,600
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HEDRICK CORPORATION
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Statement of Cash Flows
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For the year ending December 31, 20X9
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Cash flows from operating activities:
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Net income
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$ 150,000
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Add (deduct) noncash effects on operating income
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Depreciation expense
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$ 160,000
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Decrease in accounts receivable
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43,700
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Increase in inventory
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(87,500)
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|
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Decrease in accounts payable
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(8,100)
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|
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Decrease in income taxes payable
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(8,600)
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99,500
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Net cash provided by operating activities
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$ 249,500
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Cash flows from investing activities:
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Purchase of equipment
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(20,400)
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Cash flows from financing activities:
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Repayment of long-term borrowing
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(18,500)
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Net increase in cash
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$ 210,600
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Cash balance at January 1, 20X9
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66,000
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Cash balance at December 31, 20X9
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$ 276,600
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HEDRICK CORPORATION
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Statement of Cash Flows
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For the year ending December 31, 20X9
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|
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Cash flows from operating activities:
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|
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Net income
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$ 150,000
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Add (deduct) noncash effects on operating income
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|
|
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Depreciation expense
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$ 160,000
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|
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Decrease in accounts receivable
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43,700
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Increase in inventory
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(87,500)
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Decrease in accounts payable
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(8,100)
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|
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Decrease in income taxes payable
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(8,600)
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99,500
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Net cash provided by operating activities
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$ 249,500
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|
|
|
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Cash flows from investing activities:
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|
|
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Purchase of equipment
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(20,400)
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|
|
|
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Cash flows from financing activities:
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|
|
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Repayment of long-term borrowing
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(18,500)
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Net increase in cash
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$ 210,600
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Cash balance at January 1, 20X9
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66,000
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Cash balance at December 31, 20X9
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$ 276,600
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