A firm\'s balance sheets as of the December 31, 2015 and 2016 show the following

Question

A firm's balance sheets as of the December 31, 2015 and 2016 show the following items:

2015:

Cash = $9,916,500; Account Receivable = $9,000,000; Inventory = $4,500,000; Gross Fixed Assets = $10,972,000; Accumulated Depreciation = $1,243,000; Retained Earnings = $1,967,500; Capital Surplus = $8,600,000; Common Stock ($0.50 par) = $4,500,000; Notes Payable = $8,921,000; Long term debt = $2,500,000; Accounts Payable = $6,657,000.

2016:

Cash = $11,098,000; Account Receivable = $7,600,000; Inventory = $5,200,000; Gross Fixed Assets = $13,774,000; Accumulated Depreciation = $1,675,000; Retained Earnings = $1,967,500; Capital Surplus = $17,300,000; Common Stock ($0.50 par) = $4,890,000; Notes Payable = $7,773,000; Long term debt = $1,500,000; Accounts Payable = $6,132,000.

Calculate the average price per share at which new shares were sold in 2016.

$3,46

$27.49

$9.42

$11.65

$3,46

$27.49

$9.42

$11.65

Explanation / Answer

Correct answer is option (D) $11.65

Explanation;

Value of common stock at the end of 2016 = $4890000

Value of common stock at the end of 2015 = $4500000

Thus increase in value of common stock during 2016;

($4890000 – $4500000) = $390000

Par value of common stock is given = $0.50

Thus number of newly issued shares ($390000 / $0.50) = 780000

Capital surplus at the end of 2016 = $17300000

Capital surplus at the end of 2015 = $8600000

Thus increase in capital surplus during 2016;

($17300000 – $8600000) = $8700000

Now’ let’s calculate average price per share at which new shares were sold in 2016;

($8700000 / 780000) + $0.50

$11.15 + $0.50 = $11.65

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