Pharoah Company has had 4 years of record earnings. Due to this success, the mar

Question

Pharoah Company has had 4 years of record earnings. Due to this success, the market price of its 500,000 shares of $4 par value common stock has increased from $15 per share to $55. During this period, paid-in capital remained the same at $6,000,000. Retained earnings increased from $4,500,000 to $30,000,000. CEO Don Ames is considering either (1) a 15% stock dividend or (2) a 2-for-1 stock split. He asks you to show the before-and-after effects of each option on (a) retained earnings, (b) total stockholders' equity, and (c) par value per share 1. Stock dividend - retained earnings 2. 2-for-1 stock split retained earnings Pharoah Company Original Balance After Di videndAfter Split_ Paid-in capital Retained earnings 30,000,000 26,025,000 30,000,000 Total stockholder's equity 6,000,000 9,675,000 6,000,000 Shares outstanding 38,000,000 38,000,000 38,000,000

Explanation / Answer

Stock dividend 500,000*15% 75000 75000 shares *55= 4125000 a) 1 Stock dividend -retained earnings 4125000 2 Stock split 0 After After b) original dividend Split paid in capital 6,000,000 10,125,000 6,000,000 retained earnings 30,000,000 25,875,000 30,000,000 total stockholders Equity 36,000,000 36,000,000 36,000,000 shares outstanding 500,000 575,000 1000000

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