Question

Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

B4 acquis After acquis
PV shares o/s $200,000 $250,000
Add'l PIC $350,000 $550,000

Based on the preceding information, what is the par value of Public's common stock?
A) $10
B) $1
C) $5
D) $4

Answer 1

The par value of Public's common stock is determined by dividing the increase in additional paid-in capital ($200,000) by the number of new shares issued (50,000), resulting in a par value of $4 per share.

Step-by-step explanation:

To determine the par value of Public's common stock from the information provided, we first need to find the change in the number of shares outstanding and the change in additional paid-in capital (PIC) after the acquisition.

Before the acquisition, the number of Public shares outstanding (PV shares o/s) is $200,000, and after the acquisition, it is $250,000. This reflects an increase of 50,000 shares ($250,000 - $200,000).

The additional paid-in capital before acquisition is $350,000, and after acquisition, it is $550,000. Therefore, the increase in additional PIC is $200,000 ($550,000 - $350,000).

Since the acquisition was made with an exchange of shares, and we assume all shares have the same par value, we can calculate the par value of each share. We do this by dividing the increase in additional PIC by the increase in the number of shares.

Par value per share = Increase in Additional PIC / Increase in number of shares = $200,000 / 50,000 shares = $4.00 per share.

Thus, the correct answer is D) $4.