Question

5. Below is the common equity section (in millions) of Timeless Technology’s last two year-end balance sheets: 2018 2017 Common stock 2,000 1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? a. The company’s net income in 2018 was higher than in 2017. b. The firm issued common stock in 2018. c. The market price of the firm's stock doubled in 2018. d. The firm had positive net income in both 2017 and 2018, but its net income in 2018 was lower than it was in 2017. e. The company has more equity than debt on its balance sheet.

Answer 1

The correct statement is that the firm issued common stock in 2018, as evidenced by the common stock value doubling from 2017 to 2018. Additionally, Timeless Technology had a lower net income in 2018 compared to 2017, reflected in the reduction of retained earnings.

Step-by-step explanation:

The student asked which statement is correct regarding the common equity section of Timeless Technology’s balance sheet, specifically regarding the changes from 2017 to 2018.

Based on the provided information, it's clear that the firm issued common stock in 2018 as the common stock value increased from $1,000 million in 2017 to $2,000 million in 2018 without paying any dividends. Additionally, the retained earnings decreased, which implies that the firm had positive net income in both years but that its net income in 2018 was lower than it was in 2017. If the firm had negative net income or a loss, retained earnings would have decreased more than the net income for the year. Since the firm has never paid a dividend, the only way retained earnings would have decreased is from the company having a smaller net income that was still positive.

Answer 2

(B) The firm issued common stock in 2018

Step-by-step explanation:

Given that the firm's common stock doubled from $1,000 to $2,000 from 2017 to 2018, it is reasonable to assume that the firm issued common stock in 2018.

Option A is incorrect as the firm's net income was likely lower and, more likely, negative in 2018. A decline in retained earnings from 2017 to 2018 by $340 suggests that the firm likely made a net loss of $340 in 2018.

Option C is incorrect because market prices of a firm's own common stock are not accounted for in its shareholders' equity. Only the book value are account for.

Option D is incorrect because the net income in 2018 was likely negative due to the year-on-year decline in the retained earnings

Option E is incorrect as we cannot ascertain it the firm has more equity than debt because sufficient information to reach that conclusion was not provided.