The stockholders’ equity section of Creighton Company’s balance sheet is shown as follows. CREIGHTON COMPANY As of December 31, 2018 Stockholders’ equity Preferred stock, $10 stated value, 7% cumulative, 300 shares authorized, 50 issued and outstanding $ 500 Common stock, $10 par value, 250 shares authorized, 100 issued and outstanding 1,000 Common stock, class B, $20 par value, 400 shares authorized, 150 issued and outstanding 3,000 Common stock, no par, 150 shares authorized, 100 issued and outstanding 2,200 Paid-in capital in excess of stated value—preferred 600 Paid-in capital in excess of par value—common 1,200 Paid-in capital in excess of par value—class B common 750 Retained earnings 7,000 Total stockholders’ equity $ 16,250 Required Assuming the preferred stock was originally issued for cash, determine the amount of cash that was collected when the stock was issued. Based on the class B common stock alone, determine the amount of the company’s legal capital. Based on the class B common stock alone, determine the minimum amount of assets that must be retained in the company as protection for creditors. Determine the number of shares of class B common stock that are available to sell as of December 31, 2018. Assuming Creighton purchases treasury stock consisting of 25 shares of its no par common stock on January 1, 2019, determine the amount of the no-par common stock that would be outstanding immediately after the purchase. Based on the stockholders’ equity section shown above, can you determine the market value of the preferred stock? rev: 03_06_2018_QC_CS-120790

a. $1,100

b. $3,000

c. $3,750

d. 250 shares

e. 75 shares

f. Cannot be found because the expected rate of return is not given

Explanation:

a. Amount of cash collected when preferred stock was issued

Stated Value = $500

Paid in Capital in excess of Stated Value = $600

Cash Collected = $(500 + 600) = $1,100

b. Amount of company's legal capital based on class B common stock alone

Issued shares = 150

Par value = $20

Company's legal capital amount = 150 * 20 = $3,000

c. Minimum amount of assets that must be retained in the company as protection for creditors based on the class B common stock alone

Stated value of common stock  = $3,000

Paid in capital in excess of par value = $750

Minimum retain amount = $(3000 + 750) = $3,750

d. Number of shares of class B common stock that are available to sell as of December 31, 2018

Authorized shares = 400

Issued and outstanding = 150

Shares available to sell = 400 - 150 = 250 shares

e. Amount of the no-par common stock that would be outstanding immediately after the purchase of treasury stock as assumed

Shares before purchase = 100

Shares purchased = 25

Outstanding no-par common stock  = 100 - 25 = 75 shares

f. Market value of preferred stock

The expected rate of return is required to calculate the market value of preferred stock, but since this is not given in the question, the market value of preferred stock cannot be calculated.

Assuming the required rate of return is 12%

And the dividend rate of preferred stock is 7%

Stated Value or par value = $10

Dividend amount = $10 * 7% = $0.7

Hence the market value of preferred stock  = Dividend / Required Rate of Return

= $0.7/0.12 = $5.83

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