Show the effect on the capital accounts of a two-for-one stock split. (Do not ro

Question

Show the effect on the capital accounts of a two-for-one stock split. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

Show the effect on the capital accounts of a 10 percent stock dividend. Part b is separate from part a. In part b do not assume the stock split has taken place. (Do not round intermediate calculations and round your answers to the nearest whole dollar.)

  

  

Based on the balance in retained earnings, which of the two dividend plans is more restrictive on future cash dividends?

Squash Delight Inc. has the following balance sheet:

Explanation / Answer

a. New share = 80,000 x (1 + 2/1) = 240,000 shares
Face Value = 160,000/240,000 = $0.67 per share

b. Total shares outstanding after stock dividend = 80,000 x 110% = 88,000 shares
Face value = 80,000/88,000 = $0.91 per share

c. Under both the methods the market capitalization and value of the firm will remain same. But since under stock split stockholders will have more shares, thus company can choose stock split.

Common stock (240,000 shares @ $0.67 par) 160,000   Capital in excess of par 100,000   Retained earnings 513,000      Total owners' equity $ 1,119,000

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