Posted: January 10th, 2022
Early in 2007, Herndon Industries was formed with authorization to issue 200,000 shares of $10 par value common stock and 30,000 shares of $100 par value cumulative preferred stock. During 2007, all the preferred stock was issued at par, and 120,000 shares of common stock were sold for $16 per share. The preferred stock is entitled to a dividend equal to 10 percent of its par value before any dividends are paid on the common stock. During its first five years of business (2007 through 2011), the company earned income totaling $3,700,000 and paid dividends of 50 cents per share each year on the common stock outstanding. On January 2, 2009, the company purchased 20,000 shares of its own common stock in the open market for $400,000. On January 2, 2011, it reissued 10,000 shares of this treasury stock for $250,000. The remaining 10,000 were still held in treasury at December 31, 2011.
a. Prepare the stockholders’ equity section of the balance sheet for Herndon Industries at December 31, 2011. Include supporting schedules showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends reduce retained earnings. Dividends are not paid on shares of stock held in treasury.)
b. As of December 31, compute Herndon’s book value per share of common stock. (Hint: Book value per share is computed only on the shares of stock outstanding.)
c. At December 31, 2011, shares of the company’s common stock were trading at $30. Explain what would have happened to the market price per share had the company split its stock 3-for-1 at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.
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