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Chapter 15: Question 6Q (page 810)

What is meant by par value, and what is its significance to stockholders?

Short Answer

Expert verified

The par value is a fixed and arbitraryamount per share attributed to the shares by the incorporators. It helps to determine the overall value of the shares issued.

Step by step solution

01

Meaning of Par Value

The face value of a bond is referred to as par value. The par value determines its maturity value and the dollar value of coupon payments, which is why it is essential for bond or fixed-income instruments.

02

Significance of par value to stockholders

Except maybe when shares are first offered to the public, the par value has little to no impact on shareholders.

Market forces of demand and supply decide the market prices of stock shares that most shareholders must acquire for those shares; hence the par value has no bearing on those prices.

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Most popular questions from this chapter

What factors influence the dividend policy of a company?

Graves Mining Company declared, on April 20, a dividend of \(500,000 payable on June 1. Of this amount, \)125,000 is a return of capital. Prepare the April 20 and June 1 entries for Graves.

Nottebart Corporation has outstanding 10,000 shares of \(100 par value, 6% preferred stock and 60,000 shares of \)10 par value common stock. The preferred stock was issued in January 2017, and no dividends were declared in 2017 or 2018. In 2019, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative?

Distinguish between common and preferred stock

(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.

Asset

Current assets \(22,000

Equipment (net) 450,000

\)472,000

Liabilities and Stockholders’ Equity

Current liabilities \(50,000

Common stock 250,000

Retained earnings 172,000

\)472,000

Additional authorized common stock of \(300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of \)100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.

Instructions

  1. Which stockholder’s right was ignored in the issue of shares to Derek Wallace?
  2. How may the damage to Baker’s interests be repaired most simply?
  3. If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.
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