Consider the following shareholders' equity account of Beta Electronic Corporation (BEC) as on December 31, 2023: ParticularsAmount (Rs)Common stock (10,000shares @ Rs100 par)1,000,000Additional…

Model Answer: Financial Management (FIN207) – TU Board 2025

a. Number of Shares Outstanding and Market Price After 20% Stock Dividend

Step 1: Determine the number of shares outstanding before the stock dividend

• Common stock (par value): Rs 100 per share
• Total common stock: Rs 1,000,000
• Number of shares outstanding (before dividend): $$\frac{\text{Total common stock}}{\text{Par value per share}}=\frac{1,000,000}{100}=10,000\text{ shares}$$

Step 2: Calculate the number of new shares issued due to a 20% stock dividend

• Stock dividend percentage: 20%
• New shares issued: $$10,000\times 20\%=2,000\text{ shares}$$

Step 3: Total shares outstanding after the stock dividend $$10,000+2,000=12,000\text{ shares}$$

Step 4: Determine the new market price per share

• Total market capitalization before dividend: $$10,000\text{ shares}\times Rs150=Rs1,500,000$$
• Total market capitalization remains the same (no signaling effect), so: $$\text{New market price}=\frac{1,500,000}{12,000}=Rs125\text{ per share}$$

Final Answer:

• Number of shares outstanding after stock dividend: 12,000 shares
• New market price per share: Rs 125

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b. Effect of 20% Stock Dividend on Shareholders’ Equity Account

Before Stock Dividend:

After Stock Dividend (20%):

• Retained earnings decrease by the par value of new shares issued: $$2,000\text{ shares}\times Rs100=Rs200,000$$
• Additional paid-in capital increases by the difference between market value and par value of new shares: $$(150-100)\times 2,000=Rs100,000$$

New Shareholders’ Equity Account:

Explanation:

• No change in total equity (since stock dividends do not affect total equity, only its composition).
• Retained earnings decrease because the company issues new shares from retained earnings.
• Additional paid-in capital increases because the market price (Rs 150) exceeds the par value (Rs 100).

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c. Effect of 2-for-1 Stock Split on Number of Shares and Market Price

Step 1: Determine the number of shares after a 2-for-1 stock split

• Current shares: 10,000
• After 2-for-1 split: $$10,000\times 2=20,000\text{ shares}$$

Step 2: Determine the new market price per share

• Total market capitalization before split: Rs 1,500,000 (as calculated earlier)
• New market price per share: $$\frac{1,500,000}{20,000}=Rs75\text{ per share}$$

Final Answer:

• Number of shares after 2-for-1 split: 20,000 shares
• New market price per share: Rs 75