29, HW11 #29: COMMON STOCK DIVIDEND AND STOCK SPLIT: On y\'s balance October 31

Question

29, HW11 #29: COMMON STOCK DIVIDEND AND STOCK SPLIT: On y's balance October 31 the stockholders' equity section of Eaton Compan sheet consists of common stock $600,000 and retained earnings Eaton is considering the following two courses of action: (1) declaring a 10% stock dividend on the 60,000 $ 10 par value shares outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share. $400,000. Instructions Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column eadings: Before Action, After Stoek Dividend, and After Stock Split Before Action After Stock Dividend After Stock Split Stockholders' equity Paid-in capital Common stock In excess of par value $600,000 Total paid-in capital 600,000 400,000 Retained earnings Total stockholders' equity $1L000.000 $L000,000 $1.000.000 60,000 $16.67 Outstanding shares Book Value per share HW11#30: RATIO ANALYSIS:Simpson Corporation provided the following data at December 31, 2017: net income $900,000, average common stockholders' equity $6,000,000, preferred stock dividends $80,000, and cash dividends declared on common stock $10,000. Compute the Payout ratio and the Return on Common Stockholders' Equity ratio. (rounding) A) 8.9% and 13.67% B) 1.11% and 15.00% C) 10.0% and 16.33% D) 1.11% and 13.67%

Explanation / Answer

Question HW11#30). Answer :- Option D) 1.11 % and 13.67 %.

Explanation :- Return on common stockholders' equity = (Net income - Preferred dividend) / Average common stockholders' equity

= (900000 - 80000) / 6000000

= 820000 / 6000000

= 0.1367 i.e., 13.67 %

Payout ratio = Dividend paid to common stockholders / Net income.

= 10000 / 900000

= 0.0111 i.e., 1.11 %

Conclusion :- Payout ratio = 1.11 % and Return on common stockholders' equity = 13.67 %

(Option D, 1.11 % and 13.67 %).

Note :- Pay out ratio includes only dividend paid to common stockholders. Pay out ratio does not include the dividend paid to preferred stockholders.

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