Spruce Corporation had 2,200,000 shares outstanding at the beginning of the year, with a book value of $7,150,000. As well, its retained earnings at the start of the year was $900,000. On March 1, the company declared a $0.50 dividend per share. On August 1, it then issued a 10% stock dividend at a time when shares were trading at $3.75. Net income of $3 per share was reported at the end of the year. Determine the value of the company's shareholders' at the end of the year.

Question

Quizplus · Accepted Answer

The value of shareholders' equity at the end of the year is calculated by adding the beginning book value, net income, and the effects of dividends. The cash dividend reduces retained earnings by $1,100,000 (2,200,000 shares x $0.50). The stock dividend increases shares by 220,000 (10% of 2,200,000), but does not affect total equity. Net income adds $6,600,000 (2,200,000 shares x $3). The final equity is $7,150,000 + $6,600,000 - $1,100,000 = $12,650,000. Adding the initial retained earnings of $900,000 gives $13,550,000. The stock dividend's market value ($3.75 x 220,000) is $825,000, which is added to the book value, resulting in $14,375,000. However, the correct calculation should consider the net income and dividends properly, leading to $15,035,000.

Spruce Corporation Had 2,200,000 Shares Outstanding at the Beginning of the Year