Balsam Corporation had 1,500,000 shares outstanding at the beginning of the year, with a book value of $3,000,000. As well, its retained earnings at the start of the year was $700,000. On May 1, the company declared a $0.75 dividend per share. On July 1, it then issued a 15% stock dividend at a time when shares were trading at $4. Net income of $2 per share was reported at the end of the year. Determine the value of the company's shareholders' at the end of the year.

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Quizplus · Accepted Answer

To calculate the value of the company's shareholders' equity at the end of the year, we need to consider the initial book value, dividends declared, stock dividends, and net income.1. Initial book value: $3,000,0002. Retained earnings at the start: $700,0003. Cash dividends: 1,500,000 shares * $0.75 = $1,125,0004. Stock dividends: 1,500,000 shares * 15% = 225,000 additional shares. Since the stock dividend does not affect retained earnings directly (it redistributes equity), we don't subtract its value in cash but consider its effect on share count.5. Net income: 1,500,000 shares * $2 = $3,000,000After the stock dividend, the total shares are 1,725,000 (1,500,000 + 225,000).The total value at the end of the year before considering dividends and net income is the initial book value plus retained earnings: $3,000,000 + $700,000 = $3,700,000.Subtracting the cash dividends paid out: $3,700,000 - $1,125,000 = $2,575,000.Adding the net income: $2,575,000 + $3,000,000 = $5,575,000.However, this calculation does not account for the increase in total equity due to the stock dividend. The stock dividend increases the number of shares but does not directly change the total equity. The value of the stock dividend in terms of equity is not directly given but is reflected in the increased share count, which has already been considered in the calculation of net income per share and its total contribution to equity. Therefore, the correct calculation should focus on the net effect of cash dividends and net income on the initial equity.Correcting the oversight and focusing on the net changes:- Initial equity: $3,700,000 (book value + retained earnings)- Subtract cash dividends: -$1,125,000- Add net income: +$3,000,000Final equity value: $3,700,000 - $1,125,000 + $3,000,000 = $5,575,000.Given the options provided and the calculations, it seems there has been a mistake in the calculation process as none of the options directly match the recalculated figure. The correct approach involves adjusting for dividends and net income, but the options provided suggest a misunderstanding in the calculation or a misinterpretation of the question's requirements. The closest match or intended calculation might have involved additional considerations not accounted for in the provided explanation, such as the valuation of the stock dividend which should be considered in terms of its effect on share count rather than direct financial value subtracted or added to the equity. Given the provided data and standard calculation methods, the expected outcome does not match the options, indicating a need for clarification or correction in the approach or the question's assumptions.

Balsam Corporation Had 1,500,000 Shares Outstanding at the Beginning of the Year