Question

Washburn Company owns 75 percent of Metcalf Company's outstanding common stock. During the current year, Metcalf issues additional shares to outside parties at a price more than its per share consolidated value. How does this transaction affect the business combination?

(A) The business combination is unaffected.
(B) The Washburn Company's ownership interest in Metcalf Company decreases.
(C) The Washburn Company's ownership interest in Metcalf Company increases.
(D) The consolidated value of the business combination increases.

Answer 1

When Metcalf Company issues additional shares at a price higher than its per share consolidated value, the ownership interest of Washburn Company in Metcalf Company decreases.

Step-by-step explanation:

When Metcalf Company issues additional shares to outside parties at a price higher than its per share consolidated value, it means that the new shares are being sold at a premium. In this case, the business combination between Washburn Company and Metcalf Company is affected because the ownership interest of Washburn Company in Metcalf Company decreases. The reason for this decrease is that the ownership percentage of Washburn Company remains the same (at 75%), but the total number of shares outstanding increases due to the issuance of additional shares to outside parties.