Early in 2014, Laird Industries was formed with authorization to issue 150,000 shares of $20 par value common stock and 10,000 shares of $100 par value cumulative preferred stock. During 2014, all the preferred stock was issued at par, and 80,000 shares of common stock were sold for $35 per share. The preferred stock is entitled to a dividend equal to 6 percent of its par value before any dividends are paid on the common stock.
During its first five years of business (2014 through 2018), the company earned income totaling $3,800,000 and paid dividends of 60 cents per share each year on the common stock outstanding.
On January 2, 2016, the company purchased 1,000 shares of its own common stock in the open market for $40,000. On January 2, 2018, it reissued 600 shares of this treasury stock for $30,000. The remaining 400 shares were still held in treasury at December 31, 2018.
Required:
Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Dividends are not paid on shares of stock held in treasury).
As of December 31, 2018, compute the company’s book value per share of common stock.
At December 31, 2018, shares of the company’s common stock were trading at $56. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain would have happened to the par value of the common stock and to the number of common shares outstanding.