Mopara Inc. is authorized to issue 5,000,000 shares of $10 par common stock. 500

ID: 2720128 • Letter: M

Question

Mopara Inc. is authorized to issue 5,000,000 shares of $10 par common stock. 500,000 shares of stock were originally sold for $25 per share. The stock is currently selling for $20 per share and Mopara has decided to repurchase 12,000 shares of stock.

When Mopara repurchases their own stock, how much gain or loss will the company recognize on its income statement? Explain.

A. $ 60,000 loss

B. $180,000 gain

C. $-0-

D. $ 60,000 gain

AND

The Home Supply Co. reported an ROE of 11.5% and a ROA of 6.2% for the year. Which statement is true concerning The Home Supply Co.? Explain.

A. It generated more operating income than cash flows during the year.

B. It effectively utilized financial leverage.

C. It distributed 5.3% of its profits as dividends to its investors.

D. Its debt is equal to 5.3% of total assets.

Explanation / Answer

When Mopara repurchases their own stock, how much gain or loss will the company recognize on its income statement

entry for repurchase is

Treasury stock 240000

cash 240000

There is no impact on income statement due to repurchase. Hence answer is option C i.e $0

The Home Supply Co. reported an ROE of 11.5% and a ROA of 6.2% for the year. Which statement is true concerning The Home Supply Co.

Asset = equity + liability

hence generally equity is lower than assets due to outside liability

Hence option B is correct ie. It effectively utilized financial leverage