The Stockholders’ Equity section of the Balance Sheet of Carpenter Corporation on December 31, 2015, showed Cumulative Preferred 8% Stock, $46 par (1,955 shares authorized, 500 shares issued); Common Stock, $23 par (29,199 shares authorized,8,373 shares issued); and Retained Earnings of $1,104. The Notes to the Financial Statements in the Annual Corporate Report for 2015 indicate that the market values of the stock are $42 per share (Cumulative Preferred) and $17 per share (Common). Forecasts in the Annual Report also indicate that investments in future growth in 2016 are expected to result in sustained increased profits. In consideration of these matters, the Board of Directors has secured approval from the Securities and Exchange Commission for a bond issuance. The Board of Directors has also decided to forego paying dividends in 2015, and to repurchase shares of the corporation’s common stock at par, with a view to reselling the stock when market rates rise with increased profitability.
On January 2, 2016, $202,937 in 11 year, 7% bonds with a market interest rate of 9%, and interest payable semiannually, were issued for $183,599. On January 3, the corporation purchased 2,148 shares of its common stock at par. Profits soared during 2016, and on May 1, the corporation resold 1,543 shares of treasury stock, at $9 above par. On June 30, bond interest was paid. On December 31, the corporation showed an after tax Net Income of $56,653. On December 31, bond interest was paid; and dividends were declared and paid. Common shareholders received $2.3 per share.
What is the effect of the stock and bond transactions on Cash on the Balance Sheet on December 31, 2016?
Cash received from issue of bonds = $183,599
Cash paid to purchase shares of common stock = 2,148 x $23 = $49,404
Cash received from sale of treasury stock = 1,543 x ($23 + $9) = $49,376
Cash paid as bond interest on June 30 = $202,937 x 7% x 1/2 = $7,102.80
Cash paid as bond interest on December 31 = $202,937 x 7% x 1/2 = $7,102.80
Cash dividends paid to preferred stockholders' = 500 x $46 x 8% = $1,840
Cash dividends paid to common stockholders' = $2.3 x (8,373 - 2,148 + 1,543) = $17,866.40
Effect of the stock and bond transactions on Cash
= $183,599 - $49,404 + $49,376 - $7,102.80 - $7,102.80 - $1,840 - $17,866.40
= $149,659 Increase
Thus, cash will increase by $149,659
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