Question

Use the following information for all questions related to Colchuck Company. Colchuck Company has the following information for Year 1 and Year 2. Year 1 is Colchuck's first year in business. Year 1: Colchuck Company issues 2,000 shares of $1 par value common stock for $12 per share. Colchuck issues 100 shares of 10% cumulative preferred stock, which has a par value of $10. Colchuck received $11 per preferred share from investors. Colchuck earns income in its first year of operations of $10,000. Colchuck does not pay a dividend in Year 1. Year 2: Colchuck buys 200 shares of its own common stock from the market for $14 per share. Colchuck initiates a 2:1 common stock split on outstanding common shares. Colchuck earns income of $20,000 and declares, but does not pay, dividends of $12,000 to be divided among preferred and common shareholders. Calculate retained earnings for Colchuck Company as of December 31st, Year 2, after all closing entries have been made. What amount of cash dividends will preferred shareholders of Colchuck Company receive in Year 2? Calculate Colchuck's total stockholder's equity at the end of Year 2.

Answer 1

To determine the value of a share of Babble, Inc., calculate the present value of future dividends and divide by the number of shares. Assuming a 15% interest rate and the given profit stream, the price per share would be approximately $256,500.

Step-by-step explanation:

Valuation of Babble, Inc. Stock:

To calculate the value of a share of stock in Babble, Inc., one must determine the present value (PV) of the expected future dividends, since the company plans to pay out all profits as dividends and be disbanded in two years.

First, we calculate the present value of the dividends at each time period, assuming a certain rate of return required by investors. Next, we add up all the present values to get a total value of the firm's profit stream in today's dollars. This total is then divided by the number of shares to determine the price per share.

Calculation of Babble, Inc. Stock Value:

Assuming a 15% interest rate, the present value (PV) of the dividends at the end of year 1 and year 2 is calculated using the formula PV = Dividend/(1 + r)^t, where 'r' is the rate of return and 't' is the time in years.

Once we have the present value for each time period's dividend, we add them up and divide by the number of shares, 200 in this case, to find the price per share an investor would be willing to pay.

Based on the given profits of $15 million, $20 million, and $25 million, at the time of disbandment, the price per share should be about $256,500 per share.

Answer 2

The retained earnings for Colchuck Company as of December 31st, Year 2, after all closing entries have been made is $8,000. Preferred shareholders of Colchuck Company will receive 10 shares in cash dividends in Year 2. The total stockholders' equity at the end of Year 2 for Colchuck Company is $33,100.

Step-by-step explanation:

The retained earnings for Colchuck Company as of December 31st, Year 2, after all closing entries have been made can be calculated by subtracting dividends declared but not paid from net income.

In Year 2, Colchuck earned $20,000 in income and declared $12,000 in dividends.

So, the retained earnings for Year 2 would be $20,000 - $12,000 = $8,000.

The cash dividends that preferred shareholders of Colchuck Company will receive in Year 2 can be calculated by multiplying the number of preferred shares by the dividend rate.

In Year 2, Colchuck issued 100 shares of 10% cumulative preferred stock.

So, the cash dividends for preferred shareholders in Year 2 would be 100 shares x 10% dividend rate = 10 shares.

To calculate Colchuck's total stockholders' equity at the end of Year 2, we need to add the common stock, preferred stock, and retained earnings.

In Year 1, Colchuck issued 2,000 shares of $1 par value common stock, which is worth $12 per share, so the common stock is $12 x 2,000 = $24,000.

In Year 1, Colchuck also issued 100 shares of $10 par value cumulative preferred stock, which is worth $11 per share, so the preferred stock is $11 x 100 = $1,100.

The total stockholders' equity at the end of Year 2 would be the sum of common stock, preferred stock, and retained earnings: $24,000 + $1,100 + $8,000

= $33,100.