Question

One way to lower the market price of a firm's stock is via a stock split. Rock-O Corporation finds itself in a different situation: Its stock has been selling at relatively low prices. To increase the market price of the stock, the company chooses to use a reverse stock split of 2 -for-3. The company currently has 700,000 common shares outstanding and no preferred stock. The common stock carries a par value of $1. At this time, the paidin capital in excess of par is $7,000,000, and the firm's retained earnings is $3,500,000 TO DO

Create a spreadsheet to determine the following:
a. The stockholders' equity section of the balance sheet before the reverse stock split.
b. The stockholders' equity section of the balance sheet after the reverse stock split.

Answer 1

Before the reverse stock split, the stockholders' equity for Rock-O Corporation stands at $11,200,000. After a 2-for-3 reverse split, the total stockholders' equity slightly reduces to $10,966,667 due to the rounding of shares. Paid-in Capital in Excess of Par and Retained Earnings remain unchanged.

Step-by-step explanation:

Calculating Stockholders' Equity Before and After a Reverse Stock Split

The question involves creating a spreadsheet to determine the stockholders' equity section of the balance sheet before and after a reverse stock split for Rock-O Corporation. To begin, let's look at the stockholders' equity before the reverse split:

• Common Stock (700,000 shares at $1 par value) = $700,000
• Paid-in Capital in Excess of Par = $7,000,000
• Retained Earnings = $3,500,000
• Total Stockholders' Equity = Common Stock + Paid-in Capital in Excess of Par + Retained Earnings = $11,200,000

Now, after a 2-for-3 reverse stock split, the number of shares decreases while the par value remains unchanged. Here's the effect on Stockholders' Equity:

• Common Stock (700,000 shares / 3 * 2 at $1 par value) = 466,666.67 shares approximately at $1 par value = $466,667
• Paid-in Capital in Excess of Par and Retained Earnings remain unchanged
• New Total Stockholders' Equity = $466,667 + $7,000,000 + $3,500,000 = $10,966,667

The total stockholders' equity has reduced slightly due to the rounding of shares during the reverse stock split. In practice, the difference might be adjusted in the Paid-in Capital account.