question archive Wallace Corporation is conducting a special meeting of its board of directors to address some concerns raised by the stockholders
Wallace Corporation is conducting a special meeting of its board of directors to address some concerns raised by the stockholders
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Wallace Corporation is conducting a special meeting of its board of directors to address some concerns raised by the stockholders. Stockholders have submitted the following questions. Answer each question.
1. Why are common stock
and retained earnings shown separately in the shareholders’ equity section of the balance sheet?
2. Larry Ramirez, a Wallace shareholder, proposes to transfer some land he owns to the company in exchange for shares of the company stock. How should Wallace Corporation
determine the number of shares of our stock to issue for the land?
3. Preferred shares generally are preferred with respect to dividends and in the event of our liquidation. Why would investors buy our common stock
when preferred stock is available?
4. What does the redemption value of our preferred stock require us to do?
5. One of our stockholders owns 200 shares of Wallace stock and someone has offered to buy her shares for the company’s book value. Our stockholder asks us the formula for computing the book value of her stock.
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1. Corporations report common stock and retained earnings separately to comply with state laws. The laws require corporations to report stockholders' equity by source to distinguish paid-in capital, which cannot be used for cash dividends, from retained earnings.
2. We should first determine the market value of the land. Then divide the land's value by the market value of each share of stock. The result will tell us how many shares of our stock to issue for the land.
3. Investors buy common stock in the hope of earning higher returns on their investment than are available on an investment in preferred stock.
4. The redemption value of our preferred stock requires us to pay the preferred stockholders this amount when we buy back the preferred stock.
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5. |
Book value |
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|
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per share of |
= |
Total stockholders' equity − Preferred equity |
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common stock |
Number of shares of common stock outstanding |
The stockholder can multiply book value per share by the number of shares she owns. The result will be the book value of her stock.
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