The Saw Mill has shares of stock outstanding with a par value of $1 per share and a market-to-book ratio of 2.1.The balance sheet shows $5,000 in the common stock account,$58,000 in the capital in excess of par account,and $32,500 in the retained earnings account.The firm just announced a stock dividend of 50 percent.What is the book value of the common stock account after the dividend?

Question

Quizplus · Accepted Answer

The total number of shares outstanding before the stock dividend is 5,000 shares ($5,000 common stock account/$1 par value per share). After the 50% stock dividend, the number of outstanding shares will increase to 7,500 shares (5,000 x 1.5).

The market-to-book ratio is equal to the market value per share divided by the book value per share. We know that the market-to-book ratio is 2.1, so we can set up the following equation:

2.1 = (market value per share) / (book value per share)

We can solve for the market value per share by multiplying both sides by the book value per share:

2.1 x (book value per share) = (market value per share)

We know that the book value of the common stock account is equal to the sum of the common stock account, capital in excess of par account, and retained earnings account:

Book value of common stock account = $5,000 + $58,000 + $32,500 = $95,500

So, we can plug this value into our equation to find the market value per share:

2.1 x (book value per share) = (market value per share) 
2.1 x (95,500 / 5,000) = $40.95

Before the stock dividend, the book value per share is equal to the book value of the common stock account divided by the number of shares outstanding:

Book value per share before dividend = ($5,000 + $58,000 + $32,500) / 5,000 = $19.10

After the stock dividend, the book value per share will change because the number of outstanding shares has increased. The new book value of the common stock account will be:

New book value of common stock account = ($5,000 + $58,000 + $32,500) / 7,500 = $10.00

Therefore, the book value of the common stock account after the dividend is $7,500 ($10.00 per share x 750 shares issued for the dividend). The best choice is D.

The Saw Mill Has Shares of Stock Outstanding with a Par