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If a firm has retained earnings of $2
If a firm has retained earnings of $2.6 million, a common shares account of $4.6 million, and additional paid-in capital of $9.2 million, how would these accounts change in response to a 10 percent stock dividend? Assume market value of equity is equal to book value of equity. (Enter your answers in dollars not in millions. Input all amounts as positive values. Indicate the direction of the effect by selecting "increase," "decrease," or "no change" from the drop-down menu.)
Expert Solution
Computation of Changes in Common Stock, Additional Paid in Capital and Retained Earnings:
Stock Dividend:
Common Stock = $4,600,000 *10 % = $460,000
Additional Paid in Capital = $9,200,000 * 10% = $920,000
New Balance:
Common Stock = $4,600,000 + $460,000 = $5,060,000
Additional Paid in Capital = $9,200,000 + $920,000 = $10,120,000
Retained Earnings = Balance - ( Dividend on Common Shares + Paid in Capital) = $2,600,000 - ($460,000 + $920,000 ) = $1,220,000
So,
Common Stock increases to $5,060,000.
Additional Paid in Capital increases to $10,120,000.
Retained Earnings decrease to $1,220,000.
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