Assume a firm has declared a 20% stock dividend on its 1 million shares of outstanding $5 par value common stock. If the market value of the stock at the date of the stock dividend is $14 per share and the retained earnings account balance before the stock dividend was $7,600,000, what is the retained earnings account balance after the stock dividend?

Question

Quizplus · Accepted Answer

A 20% stock dividend means the firm will issue 20% more shares. In this case, the firm will issue 20% of 1 million shares, which is 200,000 shares. The total number of outstanding shares will increase to 1,200,000 shares (1 million + 200,000).

The par value of each share remains at $5, but the market value of each share is now $14. This means the total market value of the outstanding shares is now 1.2 million x $14 = $16.8 million.

The value of the stock dividend is therefore $14 x 200,000 = $2.8 million.

The retained earnings account balance will decrease by the value of the stock dividend because the firm is giving away a portion of its earnings to the shareholders. The new retained earnings account balance will be:

$7,600,000 - $2,800,000 = $4,800,000.

Therefore, the correct answer is D.

Assume a Firm Has Declared a 20% Stock Dividend on Its