【正文】 Common stock, 400,000 $ 1,600,000 + (20,000 shares $ 1,680,000 shares $4par $4 par) = +80,000Additional paidin capital 8,400,000 + [20,000 shares 9,320,000 ($50 – $4)] = +920,000Retained earnings 9,000,000 – (20,000 $50) 8,000,000 = –1,000,000Stockholders’ equity $19,000,000 $19,000,000Overall market value of stock assumed $50 $20,000,000 assumed $* $20,000,000*Total shares outstanding 400,000 420,000Individual shareholder: Assumed ownership of shares 5,000 5,250 Percentage ownership interest % Still %* Many simultaneous events affect the level of stock prices, including expectations regarding the general economy, the industry, and the specific pany. Thus, the market price of a stock may move in either direction when a stock dividend is declared. Theory and plicated case studies indicate that a stock dividend should, on average, have zero effect on the total market value of the firm. Accordingly, the new market price per share should be $20,000,000 247。 $.50 = 40% Dividendyield ratio = Common dividends per share 247。 189。 Number of mon shares outstanding = ($118 $15) 247。 Common Dividends Net Ine Declared In Arrears Declared 20X1 $(5,000,000) – $5,000,000 – 20X2 (4,000,000) – 10,000,000 – 20X3 15,000,000 $ 6,000,000** 9,000,000* – 20X4 20,000,000 14,000,000*** – $6,000,000*** 20X5 14,000,000 5,000,000 – 9,000,000 Total $40,000,000 $25,000,000 $15,000,000 * $5 million per year times 3 years, less $6 million paid in 20X3. ** Available to declare = $(5) + $(4) + $15 = $6 million. All goes to preferred.*** Available to declare = $20 million, preferred receives $9 million arrearage plus $5 million for 20X4, balance to mon.The board of directors is not legally obligated to declare dividends at any time. Whether these amounts would be declared and paid at the indicated times would depend on the cash position, liabilities, and general financial plans. Indeed, the likelihood of these large dividends being paid so soon is small. Nonetheless, as long as the balance of retained earnings is positive, in most states, the board could legally declare dividends that would decrease the balance to zero.Holders of cumulative stock would receive accumulated dividends before the holders of mon shares received any dividends. Failure to pay dividends at the specific dates results in arrearages, which is a word monly used to describe accumulated unpaid preferred dividends. The amount of dividends in arrears is not a liability. Why? Because no dividends are liabilities until declared.2. Net IneDividends Declared Preferred Common19X1$(5,000,000)––19X2(4,000,000)––19X315,000,000$5,000,000 $1,000,00019X420,000,0005,000,000 15,000,00019X5 14,000,000 5,000,000 9,000,000$40,000,000$15,000,000$25,000,000If the preferred is not cumulative, preferred shareholders get only $15,000,000 pared to $25,000,000 otherwise.1035 (5–10 min.) This preferred stock is cumulative, so all missed preferred stock dividends must be paid before paying any mon stock dividends. Preferred dividends for 20X1, 20X2, and 20X3 are: .07 $3,000,000 3 = $630,000 After paying $630,000 in preferred dividends, $370,000 is left for mon stock dividends: $1,000,000 – $630,000 = $370,0001036 (10 min.) Amounts are in millions of yen.Amount of dividends: 1, million 165。62 247。 Cash 158,611 Common stock 103,517 Capital surplus 55,094 To account for 165。 they buy them from other investors in the market. Thus, what a shareholder pays is often quite different from his or her share of stockholders’ equity (book value per share). An individual investor’s return is best measured by dividends plus price increase divided by the price paid for the shares.1025 A mon stock with a market price of less than book value may not necessarily be an attractive investment. The forecasted earnings of the pany may be too low to justify a higher market price. The book value may not recognize a large contingent liability from a law suit. For example, a major uncertainty for tobacco panies relates to the possibility that lawsuits by former smokers will be successful. While the risk is real, the oute is far too uncertain to record on the books. Further, book value includes the original costs of assets, which may be far below or above their current values.1026 This is a reasonable argument if panies were allowed to repurchase shares without investors knowing what they were doing. However, in the United States, panies must announce programs to repurchase shares and are restricted from trading around the time of certain information events such as earnings releases. So, as long as the pany announces that they will be repurchasing before doing so, it does not seem there is much of a problem. As pointed out in the text, everyone is better off with repurchases than with dividends. Repurchases allow those who desire cash to obtain it at lower tax cost than if it were received as a dividend and protects those who do not want cash from receiving a dividend, paying taxes, and having to reinvest the after tax proceeds from the dividend. Further, no shareholder is forced to sell shares back to the pany.1027 The notion of gains or losses in the ine statement that arise from transactions in the pany’s own stock is problematic for two reasons. First, it suggests that the pany is in the business of buying and selling its own stock. This is false. The pany should never seek to make gains or losses in transactions with its shareholders. So if it is not an activity that is part of the ongoing profitmaking intention of the pany, it should not be shown in the ine statement. Moreover, panies announce their inte