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

Step 1: Calculate the total dividends paid out
Dividend per share = $0.50
Number of shares = 2,200,000

Total dividends paid out = Dividend per share x Number of shares
Total dividends paid out = $0.50 x 2,200,000
Total dividends paid out = $1,100,000

Step 2: Calculate the value of the stock dividend
Stock dividend = 10% x 2,200,000
Stock dividend = 220,000 shares

Value of stock dividend = Number of shares x Market value per share
Market value per share = $3.75

Value of stock dividend = 220,000 x $3.75
Value of stock dividend = $825,000

Step 3: Calculate the total number of shares outstanding at the end of the year
Number of shares outstanding = 2,200,000 + 220,000
Number of shares outstanding = 2,420,000

Step 4: Calculate the total shareholders' equity at the end of the year
Book value at the beginning of the year = $7,150,000
Retained earnings at the beginning of the year = $900,000
Net income per share = $3
Number of shares outstanding at the end of the year = 2,420,000

Total shareholders' equity = Book value + Retained earnings + Net income - Total dividends paid out + Value of stock dividend
Total shareholders' equity = $7,150,000 + $900,000 + ($3 x 2,420,000) - $1,100,000 + $825,000
Total shareholders' equity = $9,480,000

Step 5: Calculate the total value of the company's shareholders' equity
Total value of shareholders' equity = Number of shares outstanding x Market value per share
Total value of shareholders' equity = 2,420,000 x $6.20
Total value of shareholders' equity = $15,004,000

Therefore, the best choice is C ($15,035,000) as it is the closest answer to the calculated value of $15,004,000.

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