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Chapter 15: Question 14Q (page 810)

For what reasons might a corporation purchase its own stock?

Short Answer

Expert verified

A corporation may repurchase its company’s shares to increase EPS and other financial ratios to help increase the company’s assets.

Step by step solution

01

Meaning of Stock.

A stock is a type of security issued by a company that represents a percentage of ownership in the corporation. It is considered a way for corporations to make money from the general public.

02

The Reason for the Corporation Purchasing Its Own Stock

For a variety of reasons for which a firm purchases its own stock are as follows:

  1. Tax-efficient distributionof cash to shareholders
  2. In the case of employee stock compensation plans or prospective mergers, supplying stock is necessary.
  3. avoiding takeovers or keeping the number of shareholders low
  4. Initiating a stock market.

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Most popular questions from this chapter

(Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.

2015 \(260,000net loss 2016 \)40,000 net loss 2017 \(800,000 net income

At December 31, 2017, Morgan Sondgeroth Inc. capital accounts were as follows.

8% cumulative preferred stock, par value \)100;

authorized, issued, and outstanding 5,000 shares \(500,000

Common stock, par value \)1.00; authorized 1,000,000 shares;

issued and outstanding 750,000 shares \(750,000

Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock on December 31, 2017.
  2. Compute the book value of the common stock on December 31, 2017, assuming that the preferred stock has a liquidating value of \)106 per share.

Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?

Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.

What are the principal considerations of a board of directors in making decisions involving dividend declarations? Discuss briefly.

Woolford Inc. declared a cash dividend of $1.00 per share on its 2 million outstanding shares. The dividend was declared on August 1, payable on September 9 to all stockholders of record on August 15. Prepare all journal entries necessary on those three dates.
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