30 Minutes, Strong
Stockholders’ e
q
uit
y
:
6%
p
referred stock, $100
p
ar, cumulative, authorized and
issued and outstandin
g
10,000 shares 1,000,000$
Common stock, $20
p
ar, 150,000 shares authorized,
80,000 shares issued, of which 400 shares are held in
treasur
y
1,600,000
Additional
p
aid-in ca
p
ital: Common stoc
k
1,200,000
PROBLEM 11.9B
a. LAIRD INDUSTRIES
December
31
,
2015
Partial Balance Sheet
LAIRD INDUSTRIES
p
p
15 Minutes, Medium
a.
b.
c. The market price of the 7%, $100 par value convertible preferred stock should rise
approximately in proportion to the increase in the market value of the common stock. This
The current market price of the convertible preferred stock is too high to be explained by its
market price of the convertible preferred should also increase to remain approximately equal
in value to three shares of common stock.
The market price of the 10%, $100 par value preferred stock may be expected to decline
SOLUTIONS TO CRITICAL THINKING CASE
S
FACTORS AFFECTING THE MARKET PRICE
S
CASE 11.1
If SciFi’s profitability increases dramatically, the market price of its common stock probably
will rise significantly. The improved profitability of the company may lead to larger increases
OF PREFERRED AND COMMON STOCKS
Education.
25 Minutes, Strong
OF COMMON STOCKS
a.
b.
CASE 11.2
earnings and increased their assessments of the risk of the business. This caused the stock price to drop.
The value of a share of common stock is based on investors’ expectations about future earnings and
cash flows of the business. The increase in the price of the shares of McDonnell Douglas resulted from
The fall in the price of Citicorp’s common stock probably is impacted by the increase in the discount
rate by the Federal Reserve Board which signaled a general increase in interest rates which affected the
required yield on all investments. Since investors demanded a higher yield on their investments, stock
and bond prices suffered an overall decline.
As a financial institution, this increase in the discount rate has additional significance to Citicorp. An
increase in the discount rate increases Citicorp’s cost of funds, which will reduce its net income, at least
FACTORS AFFECTING THE MARKET PRICE
S
Group assignment:
No time estimate
CASE 11.3
• Among the “unforeseen complications” that often come to light are the problems when
partners do not see eye to eye, and the costs and complications resulting from the
corporation being a taxable entity.
• The normal reason why a business may change its form of entity is to attract more capital.
• Some students may encounter professional corporations, which often are used by one or
more members of a partnership. These professional corporations are intended to limit the
individuals’ personal liability—although they require the individual to carry “malpractice”
insurance and do not exonerate them from liability for some types of professional
misconduct. They may also encounter S corporations, which, for tax purposes, are treated as
unincorporated organizations.
SELECTING A FORM OF ORGANIZATIO
N
We do not provide comprehensive solutions for group problems that involve interviews. But the
following items normally come to light in our classes.
• Students may find that many people entered a business without giving much thought to the
form of entity.
Education.
20 Minutes, Medium
(a)
ETHICS, FRAUD & CORPORATE GOVERNANC
E
The divisions of the Securities and Exchange Commission are:
CASE 11.
4
S.E.C. ENFORCEMENT DIVISION
Corporate Finance
Enforcement
Education.
30 Minutes, Easy
a.
b.
[NOTE: The numbers in parts b. and c. will vary depending on the most recent balance used to
answer these questions.]
EXAMINING STOCKHOLDERS’ EQUITY
CASE 11.5
The company’s balance sheet dated February 2, 2013, reports that five million shares of $0.01
par preferred stock have been authorized. However, as of this date, none of these shares has
been issued.
The company has one classification of common stock:
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