Question

If a firm has retained earnings of $22.5 million, a common shares account of $274.5 million, and additional paid-in capital of $99.5 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" and "no change" from the dropdown menu.)

Retained earnings		$
Common stock		$
Additional paid-in capital		$

Answer 1

Total Capital = Common shares + Paid up capital = 274.5 + 99.5 = 374 million
Amount of stock dividend = `0.2 * 374 = 74.8 million

Retained Earnings = 22.5 - 74.8 = -52.3 ( decreases)
This amount will be transferred to both accounts
Proportion of common shares to total shares = 274.5/374 = 0.7339
Increase in common shares = 274.5/374 * 74.8 = 54.9(increase)

Proportion of paid up capital to total shares = 274.5/374 = 0.7339
Increase in paid up capital = 99.5/374 * 74.8 = 19.9(increase)

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