Magic Blade's stock has risen rapidly to $50 per share. The increase is due to excitement about its new knife that uses a light beam to slice fruits and vegetables. This process enhances the final appearance and quality of salads and fruit trays. The board of directors is considering strategies to divide the corporate ownership into more shares of stock, and bring about some reduction in the price per share. They are considering a stock split, small stock dividend, or large stock dividend. The board is unsure of the accounting effects of such transactions, and has requested information about how stockholders' equity would be impacted. Prior to the contemplated stock transaction, equity consisted of: Stockholders’ Equity Common stock, $2 par value, 2,000,000 shares authorized, 500,000 shares issued and outstanding $1,000,000 Paid-in capital in excess of par 2,000,000 Retained earnings 6,000,000 Total stockholders’ equity $9,000,000 (a) Assuming the board were to declare a 2 for 1 split, how would the revised stockholders' equity appear? (b) Assuming the board were to declare a 15% stock dividend, how would the revised stockholders' equity appear? B-14.07 Stock dividends and splits x SPREADSHEET TOOL: Holding a cell reference constant Mike Highlight Summary information for Branford Corporation's balance sheet follows: BRANFORD CORPORATION Balance Sheet August 15, 20X4 Assets Cash $ 125,000 Accounts receivable 250,000 Inventory 750,000 Property, plant, & equipment (net) 860,000 Total assets $1,985,000 Liabilities Accounts payable $125,000 Accrued liabilities 260,000 Notes payable 290,000 Total liabilities $ 675,000 Stockholders’ equity Common stock, $5 par $700,000 Paid-in capital in excess of par 300,000 Retained earnings 310,000 Total stockholders’ equity 1,310,000 Total liabilities and equity $1,985,000 Branford's business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital: Equity structure and impact I-14.01 Mike Highlight 366 | CHAPTER 14 DEBT OPTION: Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on this note would be 7%, and the note would require monthly payments. COMMON STOCK OPTION: Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly is- sued common shares. Common shares have been paying a dividend of $0.50 per share. Branford anticipates that this dividend rate will be maintained. NONCUMULATIVE PREFERRED STOCK OPTION: Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par. CUMULATIVE PREFERRED STOCK OPTION: Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred ...

1. Magic Blade's stock has risen rapidly to $50 per share. The
increase is due to excitement about its new knife
that uses a light beam to slice fruits and vegetables. This
process enhances the final appearance and quality
of salads and fruit trays.
The board of directors is considering strategies to divide the
corporate ownership into more shares of stock,
and bring about some reduction in the price per share. They are
considering a stock split, small stock dividend,
or large stock dividend. The board is unsure of the accounting
effects of such transactions, and has requested
information about how stockholders' equity would be impacted.
Prior to the contemplated stock transaction, equity consisted of:
Stockholders’ Equity
Common stock, $2 par value, 2,000,000 shares authorized,
500,000 shares issued and outstanding $1,000,000
Paid-in capital in excess of par 2,000,000
Retained earnings 6,000,000
Total stockholders’ equity $9,000,000
(a) Assuming the board were to declare a 2 for 1 split, how
would the revised stockholders' equity

2. appear?
(b) Assuming the board were to declare a 15% stock dividend,
how would the revised stockholders'
equity appear?
B-14.07 Stock dividends and splits
x
SPREADSHEET
TOOL:
Holding a
cell reference
constant
Mike
Highlight
Summary information for Branford Corporation's balance sheet
follows:
BRANFORD CORPORATION
Balance Sheet
August 15, 20X4
Assets

3. Cash $ 125,000
Accounts receivable 250,000
Inventory 750,000
Property, plant, & equipment (net) 860,000
Total assets $1,985,000
Liabilities
Accounts payable $125,000
Accrued liabilities 260,000
Notes payable 290,000
Total liabilities $ 675,000
Stockholders’ equity
Common stock, $5 par $700,000
Paid-in capital in excess of par 300,000
Retained earnings 310,000
Total stockholders’ equity 1,310,000
Total liabilities and equity $1,985,000
Branford's business is growing rapidly, and the company needs
to expand its manufacturing facilities. This
expansion will require the company to obtain an additional

4. $1,000,000 in cash. The company is exploring
five alternatives to obtain the necessary capital:
Equity structure and impact I-14.01
Mike
Highlight
366 | CHAPTER 14
DEBT OPTION:
Branford is able to borrow, on a 5-year note, the full amount
needed. The interest rate on
this note would be 7%, and the note would require monthly
payments.
COMMON STOCK OPTION:
Branford has identified an investor who is willing to pay
$1,000,000 for 40,000 newly is-
sued common shares. Common shares have been paying a
dividend of $0.50 per share.
Branford anticipates that this dividend rate will be maintained.
NONCUMULATIVE PREFERRED STOCK OPTION:
Branford has identified a hedge fund that will pay $1,000,000
for 8% noncumulative
preferred stock to be issued at par.
CUMULATIVE PREFERRED STOCK OPTION:
Branford has identified an insurance company that will pay

5. $1,000,000 for 6% cumulative
preferred stock to be issued at par.
CONVERTIBLE PREFERRED STOCK OPTION:
Branford has identified a retirement fund that will pay
$1,000,000 for 4% cumulative
preferred stock to be issued at par. The preferred stock must be
convertible into 25,000
shares of common stock at the option of the retirement fund.
(b) Which of the alternative financing scenarios involve fixed
committed payments to investors, and
which involve discretionary payments?
(c) Which one of the alternative financing scenarios presents the
least risk to existing shareholders?
Which one of the scenarios involves the most ownership
dilution for existing shareholders?
Three of the following statements are patently false. Find the
three false statements. The other statements
are true, and may include additional insights beyond those
mentioned in the textbook.
“Earnings” is synonymous with “income from continuing

6. operations plus or minus the effects
of any discontinued operations or extraordinary items.”
Changes in accounting estimates must be reported by
retrospective adjustment.
EBIT and EBITDA are accounting values that are required to be
reported on the face of the
income statement.
Other comprehensive income can be reported on the face of a
statement of comprehensive
income or in a separate reconciliation.
When there is reported change in value for available for sale
securities, “comprehensive income”
becomes synonymous with “net income.”
Book value per share is an amount related to shares of common
stock.
Trinity Railway began 20X5 with 900,000 shares of common
stock outstanding. On March 1, 20X5, Trinity
Railway issued 300,000 additional shares of common stock.
50,000 shares of common stock were reacquired
on October 1. Trinity Railway reported net income of
$2,275,000 for the year ending December 31, 20X5.
Trinity Railway paid $250,000 in common dividends during
20X5.
B-15.05 Concepts including OCI/ROA/EBIT/EBITDA/etc.
B-15.06 Earnings per share
Mike

7. Highlight
Mike
Highlight
(a) Calculate the weighted-average common shares outstanding
for 20X5.
(b) Calculate basic earnings per share for 20X5.
Calculate the price earnings ratio, PEG ratio, dividend rate, and
dividend payout ratio for each of the following
companies. Will each ratio consistently rank the companies
from "best" to "worst" performer?
Earnings
Per Share
Dividends
Per Share
Market Price
Per Share
Average Annual
Increase in Earnings
Andrews Corporation $2.50 $0.00 $25.00 5%
Borger Corporation $1.00 $1.00 $18.00 10%
Calvert Corporation $5.00 $2.50 $20.00 5%

8. P/E, PEG, Dividend rates B-15.07
x
Mike
Highlight
Fairfield Corporation owns three separate subsidiaries. The
Board of Directors is developing a strategy to
withdraw $1,000,000 in cash from one of the subsidiaries to
finance the acquisition of a fourth business.
Prepare the current and quick ratio for each subsidiary, and rank
order the subsidiaries based on their ability
to pay a dividend to the parent company without jeopardizing
liquidity.
Sub A Sub B Sub C
Cash $1,000,000 $3,000,000 $ 5,000,000
Trading securities 3,000,000 2,000,000 1,000,000
Accounts receivable 6,000,000 5,000,000 14,000,000
Inventory 4,000,000 8,000,000 7,000,000
Prepaid rent 2,000,000 2,000,000 3,000,000

9. Accounts payable 5,000,000 2,000,000 8,000,000
Interest payable 1,000,000 1,000,000 6,000,000
Note payable (due in 6 months) 4,000,000 1,500,000 4,000,000
Unearned revenues 3,000,000 500,000 2,000,000
B-16.01 Liquidity analysis
x
Mike
Highlight
Following is an incorrectly prepared statement of cash flows for
Herman Corporation. Review and correct
this presentation, using a direct approach.
HERMAN CORPORATION
Statement of Cash Flows
For the Year Ending December 31, 20X2
Cash balance at January 1, 20X2: $ 175,000

10. Cash receipts during 20X2:
Sale of building $ 800,000
Dividend received on investments 10,000
Cash received from customers 2,350,000
Proceeds from issuing stock 1,400,000 4,560,000
Cash payments during 20X2:
Purchase of inventory $ 760,000
Interest on loans 56,000
Income taxes 124,000
Repayment of long-term note payable 2,000,000
Purchase of equipment 435,000
Selling and administrative expenses 696,000
Dividends on common 175,000 (4,246,000)
Cash balance at December 31, 20X2 $ 489,000
Noncash investing/financing activities:
Bought land by issuing promissory note payable $ 450,000
B-16.09 Rearranging cash flows in good form - direct approach
Mike

11. Highlight
Mike
Typewritten Text
OPTIONAL - EXTRA CREDIT
Mike
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Mike
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Mike
Typewritten Text
Review the following technical comments about the
presentation methodology for the statement of cash
flows. Identify if the comment pertains to the "direct" or
"indirect" approach, or "both."
The operating cash flows section typically begins with net
income.
Separate disclosure is provided for noncash investing/financing

12. activities.
Requires supplemental disclosure reconciling net income to
operating cash flows.
Conceptually, the preferred approach.
Includes three separate sections - operating, investing, and
financing.
Requires supplemental disclosure of cash paid for interest and
cash paid for taxes.
A loss on the sale of a plant asset would be added back in
operating cash flows.
Waguespack Corporation and Hedrick Corporation had identical
cash positions at the beginning and end of
20X9. Each company also reported a net income of $150,000 for
20X9. Evaluate their cash flow statements
that follow.
Which company is displaying elements of cash flow stress?
What factors cause you to reach this conclusion?
What is the importance of evaluating a company's cash flow
statement?
Knowledge of cash flow statement components B-16.11
Company cash flow evaluation B-16.12
Mike
Highlight
Mike

13. Highlight
WAGUESPACK CORPORATION
Statement of Cash Flows
For the Year Ending December 31, 20X9
Cash flows from operating activities:
Net income $150,000
Add (deduct) noncash effects on operating income
Depreciation expense $ 20,000
Gain on sale of equipment (185,200)
Increase in accounts receivable (45,000)
Decrease in inventory 37,500
Increase in accounts payable 11,400
Decrease in income taxes payable (3,000) (164,300)
Net cash provided by operating activities $ (14,300)
Cash flows from investing activities:
Sale of equipment 204,900
Cash flows from financing activities:
Proceeds from long-term borrowing 20,000

14. Net increase in cash $210,600
Cash balance at January 1, 20X9 66,000
Cash balance at December 31, 20X9 $276,600
HEDRICK CORPORATION
Statement of Cash Flows
For the Year Ending December 31, 20X9
Cash flows from operating activities:
Net income $150,000
Add (deduct) noncash effects on operating income
Depreciation expense $160,000
Decrease in accounts receivable 43,700
Increase in inventory (87,500)
Decrease in accounts payable (8,100)
Decrease in income taxes payable (8,600) 99,500
Net cash provided by operating activities $249,500
Cash flows from investing activities:
Purchase of equipment (20,400)
Cash flows from financing activities:
Repayment of long-term borrowing (18,500)

15. Net increase in cash $210,600
Cash balance at January 1, 20X9 66,000
Cash balance at December 31, 20X9 $276,600
Perfect Pad manufacturers floor mats for trailers that are used to
transport horses. The mats provide for a
firm footing surface that quickly sheds water. Mats are made to
customer specifications via orders submit-
ted over an internet site. The mats are completed and shipped in
about one day. As a result, Perfect Pad does
not maintain any work in process or finished goods inventory.
The following costs were incurred in producing and selling mats
during August:
Synthetic rubber used in the mat $134,300
Lubricant used in the molding machine 14,000
Factory rent 9,600
Electricity to run the molding machine 2,600
Labor cost of machine operators 34,100
Internet sales site 1,500
Administrative salaries 12,500
Depreciation of molding machine 7,400
Salary of factory safety inspector 3,500

16. Office rent 13,500
Evaluate these costs, and determine the amount of direct
material, direct labor, factory overhead, and sell-
ing/general/administrative costs. Next, identify how much is
considered to be a "prime cost" and how much
is considered to be a "conversion cost."
Direct material/direct labor/factory overhead/SG&A B-17.04
Mike
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