Metromat has the following equity accounts on its balance sheet: $\begin{array}{lr}
\text { Common stock ( } \$ 2 \text { par, } 2.4 \text { million shares) } & \$, 800,000 \
\text { Contributed capital in excess of par } & 33,600,000 \
\text { Retained earnings } & 134,400,000 \
\text { Total common stockholders' equity }&\$172,800,000
\end{array}$ ? The current market price of Metromat's shares is $16. If the firm declares a 15% stock dividend and a $0.15 per share cash dividend, what will be the impact on contributed capital in excess of par? Assume a marginal tax rate of 40%.
A) decreases $2.56 million
B) increases $5.04 million
C) increases $5.76 million
D) does not change

Question

Quizplus · Accepted Answer

A 15% stock dividend on 2.4 million shares results in 360,000 additional shares. Since the par value is $2, the increase in common stock from the stock dividend is $720,000 (360,000 shares * $2). This amount is transferred from retained earnings to common stock, increasing contributed capital in excess of par by the difference between the market value of the new shares and their par value. The market value of the new shares is $5.76 million (360,000 shares * $16), so the increase in contributed capital in excess of par is $5.04 million ($5.76 million - $720,000). The cash dividend does not affect contributed capital in excess of par.

Metromat Has the Following Equity Accounts on Its Balance Sheet