Question

Coronado Industries issued 10800 shares of its $5 par value common stock having a fair value of $30 per share and 15300 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $511000. How much of the proceeds would be allocated to the common stock?

Answer 1

The answer is $262800 are allocated to common stock

Step-by-step explanation:

The total value of the stocks they issued is:

• Total Value = 10800*30 + 15300*20 = 630000

Out of this total value, a percentage of the proceeds will correspond to common stock and another one to preferred stock, for common stock it will be:

• 10800*30/630000

Multiplying this factor by the lump sum of the proceeds, we will get how much corresponds to Common Stock:

• (10800*30/630000)*511000 = 262800

As you can see we used the fair value of the stocks issued. Why didn´t we use the par value? Because the par value is just the value that the entity that issues it gives the instrument, it is its face value. On the other hand, the fair value is the market price of the share and it has to be used for transactions involving the issued shares.