value 10.00 points If a firm has retained earnings of $2.5 million, a common sha

Question

value 10.00 points If a firm has retained earnings of $2.5 million, a common shares account of $4.5 million, and additional paid in capital of $9.0 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to book value of equity. (Enter your answers in dollars not in millions. Input all amounts as positive values. Indicate the direction of the effect by selecting "increase" , "decrease" and "no change" from the dropdown menu.) Retained earnings Common stock Additional paid-in capital (Click to select)4 to$ (Click to select) (Click to select to $ to

Explanation / Answer

10% stock dividend would result in reduction of retained earnings by 10% of equity value.

here,

equity value = $2.5 million + $4.5 million + $9.0 million

=>$16.0 million

10% stock dividend would result in reducing retained earnings by ($16 million*10%) =>$1.6 million

=>$1,600,000.

new retained earnings = $2,500,000 - 1,600,000 =>$900,000.

common stock would increase by $1,600,000 * (4,500,000) / (4,500,000+9,000,0000) =>533,333.

common stock new balance =4,500,000+533,333 =>5,033,333

additional paid in capital increases = $1,600,000*(9,000,000/ (4,500,000+9,000,0000) =>1,066,667.

new additional paid in capital = $9,000,000 + 1,066,667 =>10,066,667.

the following is the required table:

retained earnings decrease to $900,000 common stock increase to 5,033,333 additional paid in capital increase to 10,066,667

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