Question

Discussion Question:

1. The corporate charter of Gage Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first 2 years of operation, Gage sold 70,000 shares to shareholders and reacquired 4,000 of these shares. After these transactions, how many shares are authorized, issued, and outstanding?

2. Which is the better investment—common stock with a par value of $5 per share or common stock with a par value of $20 per share?

3. What three conditions must be met before a cash dividend is paid?

4. Jayne Corporation has 10,000 shares of $15 par value common stock outstanding when it announces a 3-for-1 split. Before the split, the stock had a market price of $120 per share. After the split, how many shares of stock will be outstanding, and what will be the approximate market price per share?

Answer 1

1) Authorised Shares = 100,000

Issued Shares = 70,000

Outstanding Shares = 70,000 - 4,000= 66,000

2) Par Value doesn not make any difference as far as investment is concerned. So it is irrevant. Any of the two shares can be purchased

3) Three condisitons for dividend

a) Firm should have Retained Earnings

b) Firm should have sufficient Cash

c) Board of firm should declare dividend

4) Current Shares = 10,000

Split of 3-for-1

New number of shares outstanding = Split ratio*Current shares = 3*10,000 = 30,000

New Share Price = Current Price / Split ratio = 120/3 = $40 per share