Josette Dupress, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Josette 's opinion. She finds Collins Corporation acceptable because the equity breakdown at year-end is as follows:
Common stock, par $1 $51,900
Additional paid-in capital $99,750
Retained Earnings $336,000
The financial statement footnotes of Collins Corp. reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 25% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $12 per share on the date the stock dividend was recorded.
Required:
a. Calculate the ratio that Josette Dupress is interested in, using the year-end numbers, above.
b. Prepare the shareholders' equity for Collins Corp. showing the balances immediately before the company recorded the large stock dividend. Recalculate the ratio that Josette Dupress is interested in, using the numbers before the stock dividend.
c. Did Collins Corporation account for the dividend properly as a large stock dividend?
d. Prepare a pro forma statement of shareholders' equity treating the stock dividend as a small stock dividend. Recalculate the ratio that Josette Dupress is interested in, using these pro forma numbers.
e. What advice would you give Josette Dupress?

Question

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The Answer of Josette Dupress, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Josette 's opinion. She finds Collins Corporation acceptable because the equity breakdown at year-end is as follows:
Common stock, par $1 $51,900
Additional paid-in capital $99,750
Retained Earnings $336,000
The financial statement footnotes of Collins Corp. reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 25% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $12 per share on the date the stock dividend was recorded.
Required:
a. Calculate the ratio that Josette Dupress is interested in, using the year-end numbers, above.
b. Prepare the shareholders' equity for Collins Corp. showing the balances immediately before the company recorded the large stock dividend. Recalculate the ratio that Josette Dupress is interested in, using the numbers before the stock dividend.
c. Did Collins Corporation account for the dividend properly as a large stock dividend?
d. Prepare a pro forma statement of shareholders' equity treating the stock dividend as a small stock dividend. Recalculate the ratio that Josette Dupress is interested in, using these pro forma numbers.
e. What advice would you give Josette Dupress?

Josette Dupress, a Sagacious Investor, Prefers the Stock of a Company