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Chapter 15: Question 14Q (page 810)
For what reasons might a corporation purchase its own stock?
A corporation may repurchase its company’s shares to increase EPS and other financial ratios to help increase the company’s assets.
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(Trading on the Equity Analysis) Presented below is information from the annual report of Emporia Plastics, Inc.
Operating income | \( 532,150 |
Bond interest expense | 135,000 |
397,150 | |
Income taxes | 183,432 |
Net income | \) 213,718 |
Bonds payable | $1,000,000 |
Common stock | 875,000 |
Retained earnings | 375,000 |
Instructions
Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation’s capital stock.
S.no. | Particular | Folio | Debit \( | Credit \) |
May 2 | Cash | 192,000 | ||
Capital Stock | 192,000 | |||
(Issued 12,000 shares of \(5 par value common stock at \)16 per share) | ||||
May 10 | Cash | 600,000 | ||
| Capital Stock | 600,000 | ||
(Issued 10,000 shares of \(30 par value preferred stock at \)60 per share) | ||||
May 15 | Capital Stock | 15,000 | ||
Cash | 15,000 | |||
(Purchased 1,000 shares of common stock for the treasury at \(15 per share) | ||||
May 31 | Cash | 8,500 | ||
Capital Stock | 5,000 | |||
Gain on Sale of Stock | 3,500 | |||
(Sold 500 shares of treasury stock at \)17 per share) |
Instructions
On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.
(Stock Dividends and Stock Split) Oregon Inc. \(10 par common stock is selling for \)110 per share. Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholders’ equity section, especially retained earnings, might discourage potential investors. The board has considered three options for stimulating interest in the stock:
The board has considered three options for stimulating interest in the stock:
Instructions
Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the board’s wishes, make a recommendation. Discuss the effects of each of the foregoing options.
For what reasons might a company restrict a portion of its retained earnings?
Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a \(500 par, 12% subordinated debenture and 10 shares of \)5 par common stock. The units were sold to outside investors for cash at \(880 per unit. Prior to this sale, the 2-week ask price of common stock was \)40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.
Instructions
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