Solutions to Chapter 14 Introduction to Corporate Financing 14-1
1. a. Number of Shares = Par value of issued stock/par value per share = $60,000/$1.00 = 60,000 shares b. Outstanding shares = Issued shares – Treasury stock = 60,000 – 2,000 = 58,000 shares c. The firm can issue up to a total of 100,000 shares. Because 60,000 shares have been issued, another 40,000 shares can be issued without approval from share holders.
2. a. The issue of 10,000 shares would increase the par value of common stock by: 10,000 shares $1.00 = $10,000 Additional paid-in capital increases by: 10,000 shares $3.00 per share = $30,000 The new accounts would be as follows: Common stock $70,000 Additional paid-in capital 40,000 Retained earnings 30,000 Common equity 140,000 Treasury stock
5,000 Net common equity $135,000
b. If the company bought back 1,000 shares, Treasury stock would increase by the amount spent on the stock: $4,000. The accounts would be: Common stock $60,000 Additional paid-in capital 10,000 Retained earnings 30,000 Common equity 100,000 Treasury stock
9,000 Net common equity $91,000
3. a. funded
d. sinking fund
f. prime rate
g. floating rate
h. private placement, public issue
4. a. True b. True c. True
5. Preferred stock is like long-term debt in that it commits the firm to paying the security holder a fixed sum -- either a specified interest payment in the case of bonds or a specified dividend in the case of preferred stock. Like equity and unlike debt, however, failure to pay the dividend on preferred stock does not set off bankruptcy. 6. a. Under majority voting, the shareholder can cast a maximum of 100 votes for a favorite candidate. b. Under cumulative voting with 10 candidates, the maximum number of votes a shareholder can cast for a...
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