Cost of common stock equity Ross Textiles wishes to measure its cost of common stock equity. The firm's stock is currently selling for $57.50. The firm expects to pay a$ 3.40 dividend at the end of the year (2016). The dividends for the past 5 years are shown in the following table.

Year	Dividend
2015	$3.10
2014	2.92
2013	2.60
2012	2.30
2011	2.12

After underpricing and flotation costs, the firm expects to net$ 52 per share on a new issue. c. Using the constant-growth valuation model, determine the cost of retained earnings, $r_r$.

A 3-for-2 stock split is being considered by Mammoth Corporation. The equity position of the stockholders is now displayed. Shares of the stock currently cost $120 each. Retained earnings consist of earnings available for Common Stock for the most recent period.

$$\begin{array}{lr} \text { Preferred stock } & \$ 1,000,000 \\ \text { Common stock (100,000 shares at } \$ 3 \text { par) } & 300,000 \\ \text { Paid-in capital in excess of par } & 1,700,000 \\ \text { Retained earnings } & 10,000,000 \\ \quad \text { Total stockholders' equity } & \$ 13,000,000 \end{array}$$

What consequences might the stock split have on Mammoth?

At the end of the current year, the following information is available for both Pulaski Company and Scott Company.

$$\begin{matrix} & \text{Pulaski Company} & \text{Scott Company}\\ \text{Total assets}\ldots\ldots\ldots & \text{\$860,000} & \text{\$440,000}\\ \text{Total liabilities} \ldots\ldots\ldots & \text{360,000} & \text{240,000}\\ \text{Total equity} \ldots\ldots\ldots & \text{500,000} & \text{200,000}\\ \end{matrix}$$

1. Compute the debt-to-equity ratios for both companies. 2. Comment on your results and discuss the riskiness of each company’s financing structure.

Red Shoe Co. has summarized that additional equity financing will be needed to expand operations and that the needed funds will be best obtained through a rights offering. It has correctly determined that as a result of the rights offering, the share price will fall from $51 to$49.30 ($51 is the rights-on price;$49.30 is the ex-rights price, also known as the when-issued price). The company is seeking $17 million in additional funds with a per-share subscription price equal to$35. How many shares are there currently, before the offering? (Assume that the increment to the market value of the equity equals the gross proceeds from the offering.)

Lurvey-Priest, Inc., was organized in 2011. At December 31, 2011, the Lurvey-Priest balance sheet reported the following stockholders’ equity:

$$\begin{array}{lr} \textbf{LURVEY-PRIEST, INC.}\\ \textbf{Stockholders’ Equity}\\ \textbf{December 31, 2011}\\ \hline \text{Paid-in Capital:}&\\ \quad\text{Paid-in Capital: Preferred stock, 4\\\%, \$55 par, 140,000 shares authorized, none issued}&\$ 0\\ \quad\text{Common stock, \$2 par, 540,000 shares authorized, 62,000 shares issued and outstanding}&124,000\\ \quad\text{Paid in capital in excess of par—common}&42,000\\ \quad\quad\text{Total paid-in capital}&166,000\\ \text{Retained earnings}&28,000\\ \text{Total stockholders’ equity}&\$ 194,000\\ \end{array}$$

Requirements

1. During 2012, the company completed the following selected transactions. Journalize each transaction. Explanations are not required. a. Issued for cash 1,500 shares of preferred stock at par value. b. Issued for cash 2,000 shares of common stock at a price of $7 per share. c. Net income for the year was$78,000, and the company declared no dividends. Make the closing entry for net income.
2. Prepare the stockholders’ equity section of the Lurvey-Priest balance sheet at December 31, 2012.

Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of $\$ 0.75$ out of annual earnings per share of $\$ 2.25$. Currently, Rubenstein Bros.' stock is selling for $\$ 12.50$ per share. Adhering to the company's target capital structure, the firm has $\$ 10$ million in total invested capital, of which $40 \%$ is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of $18 \%$, which is expected to continue this year and into the foreseeable future.

What is the stock's required return?

Each of the following independent situations represents amounts shown on the four basic financial statements. 1. Revenues = $27,000; Expenses =$18,000; Net income = _____. 2. Increase in stockholders' equity = $17,000; Issuance of common stock =$11,000; Net income = $12,000; Dividends = _____. 3. Assets =$24,000; Stockholders' equity = $15,000; Liabilities = _____. 4. Total change in cash =$26,000; Net operating cash flows = $34,000; Net investing cash flows = ($17,000); Net financing cash flows = _____. Required: Fill in the missing blanks using your knowledge of amounts that appear on the financial statements.

At the end of the current year, the following information is available for both Atlas Company and Bryan Company.

$$\begin{matrix} & \text{Atlas Company} & \text{Bryan Company}\\ \text{Total assets } \ldots\ldots\ldots & \text{\$180,000} & \text{\$750,000}\\ \text{Total liabilities }\ldots\ldots\ldots & \text{80,000} & \text{562,500}\\ \text{Total equity} \ldots\ldots\ldots & \text{100,000} & \text{187,500}\\ \end{matrix}$$

1. Compute the debt-to-equity ratios for both companies. 2. Comment on your results and discuss what they imply about the relative riskiness of these companies

Stock split versus stock dividend: Firm Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders' equity position shown. The current stock price is $\$ 120$ per share. The most recent period's earnings available for common stock are included in retained earnings.

d. Contrast your answers to parts a through c with the circumstances surrounding a 50% stock dividend.

The data in the table below represent real GDP for five countries from 2006 to 2009. a. Determine the real GDP growth rate for each of the five countries from 2006 to 2007. Which country had the highest rate of economic growth between 2006 and 2007? b. Determine the real GDP growth rate for each of the five countries from 2007 to 2008. Which country had the highest rate of economic growth between 2007 and 2008? c. Determine the real GDP growth rate for each of the five countries from 2008 to 2009. Which country had the highest rate of economic growth between 2008 and 2009? d. Determine the average annual growth rate of real GDP in each of the five countries from 2006 to 2009.  Which country experienced the highest average annual rate of economic growth from 2006 to 2009 ?

The stockholders’ equity section of Leyland Corporation’s balance sheet at December 31 is presented here.

$$\begin{array}{c} \textbf{LEYLAND CORPORATION}\\ \textbf{Balance Sheet (partial)}\\ \end{array}$$

$$\begin{array}{lrr} \text{Stockholders’ equity}\\ \qquad\text{Paid-in capital}\\ \qquad\qquad\text{Preferred stock, cumulative, 10,000 shares authorized,}\\ \qquad\qquad\qquad\text{6,000 shares issued and outstanding}&\text{\$\hspace{7pt}600,000}\\ \qquad\qquad\text{Common stock, no par, 750,000 shares authorized,}\\ \qquad\qquad\qquad\text{580,000 shares issued}&\underline{\text{\hspace{6pt}2,900,000}}\\ \qquad\qquad\qquad\text{Total paid-in capital}&\text{\hspace{1pt}3,500,000}\\ \qquad\text{Retained earnings}&\underline{\text{\hspace{6pt}1,158,000}}\\ \qquad\text{Total paid-in capital and retained earnings}&\text{\hspace{1pt}4,658,000}\\ \qquad\text{Less: Treasury stock (6,000 common shares)}&\underline{\text{\hspace{19pt}32,000}}\\ \text{Total stockholders’ equity}&\underline{\underline{\text{\$\hspace{1pt}4,626,000}}}\\ \end{array}$$

Instructions

From a review of the stockholders’ equity section, answer the following questions.

(a) How many shares of common stock are outstanding?

The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows. The footnotes stated that the company had $\$14$ million in annual capital lease obligations for the next 20 years. Compute total debt to total assets on the original and revised balance sheets.

Icarus Airlines is proposing to go public, and you have been given the task of estimating the value of its equity. Management plans to maintain debt at 30% of the company's present value, and you believe that at this capital structure the company's debtholders will demand a return of 6% and stockholders will require 11%. The company is forecasting that next year's operating cash flow (depreciation plus profit after tax at 40%) will be $68 million and that investment expenditures will be$30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. a. What is the total value of Icarus? b. What is the value of the company's equity?

Dividend constraints The Howe Company's stockholders' equity account follows:

$$\begin{array}{lr}\text { Common stock (400,000 shares at } \$ 4 \text { par) } & \$ 1,600,000 \\ \text { Paid-in capital in excess of par } & 1,000,000 \\ \text { Retained earnings } & \dfrac{1,900,000}\\ \\ \text { Total stockholders' equity } &{\$ 4,500,000} \\ \end{array}$$

The earnings available for common stockholders from this period's operations are $100,000, which have been included as part of the$1.9 million retained earnings. a. What is the maximum dividend per share that the firm can pay? (Assume that legal capital includes all paid-in capital.)