Question

If a firm has retained earnings of $22.2 million, a common shares account of $274.2 million, and additional paid-in capital of $99.2 million, how would these accounts change in response to a 20 percent stock dividend? Assume market value of equity is equal to book value of equity. (Enter your answers in dollars not in millions. Leave no cells blank – be certain to enter "0" wherever required. Do not round intermediate calculations and round your final answers to the nearest whole dollar amount. Indicate the direction of the effect by selecting "increase," "decrease," or "no change" from the dropdown menu.)

Answer 1

Current Market Value of the shares = $274.2 million + $99.2 million = $373.4 million

Stock Dividend = 20% x $373.4 million = $74.68 million

It would transfer from the retained earnings account into the other two accounts.

Assuming that fair market value is reflected in the relative size of those two accounts,

$274.2 million / $373.4 million = 0.7343*$74.68 million = $54.84 million / $274.2 million = 20% would be transferred into the common shares account and

$99.2 million / $373.4 million = 0.2657*$74.68 million = $19.84 million / $274.2 million = 7.24% into the additional paid-in-capital account.