Page 518 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

WEST CORPORATION
Stockholders' equity:
Paid-in capital:
Common stock—$125 par value, 30,000 shares
authorized, issued and outstanding $3,750,000
Retained earnings 3,450,000
Total stockholders' equity $7,200,000
EAST CORPORATION
Stockholders' equity:
Paid-in capital:
Preferred stock—8%, $500 par value, cumulative 4,000 shares
authorized, issued and outstanding $2,000,000
Common stock—$125 par value, 40,000 shares authorized,
issued and outstanding 5,000,000 $7,000,000
Retained earnings 560,000
Total stockholders' equity $7,560,000
The West Corporation has paid a cash dividend of USD 6 per share each year since its creation; its common
stock is currently selling for USD 590 per share. The East Corporation's common stock is currently selling for USD

480 per share. The current year's dividend and three prior years' dividends on the preferred stock are in arrears.
The preferred stock has a liquidation value of USD 600 per share.
a. What is the book value per share of the West Corporation common stock and the East Corporation common
stock? Is book value the major determinant of market value of the stock?
b. Based solely on the previous information, which investment would you recommend to Waltrip? Why?
Annual report analysis C Determine the 2003 return on average common stockholders' equity for The
Limited in the Annual report appendix. Explain in writing why this information is important to managers,

investors, and creditors.
Ethics case D Refer to the ethics case concerning Joe Morrison to answer the following questions:
a. Which alternative would benefit the company and its management over the next several years?
b. Which alternative would benefit society?
c. If you were Morrison, which side of the argument would you take?
Group project E In teams of two or three students, examine the annual reports of three companies and
calculate each company's return on common shareholders' equity for the most recent two years. At least two years
are needed to observe any changes. As a team, decide in which of the three companies you would invest. Appoint a
spokesperson for the team to explain to the class which company the team would invest in and why.

Group project F In a team of two or three students, locate the annual reports of three companies that have
preferred stock in their stockholders' equity section. Determine the features of the preferred stock. Analyze the data
in the annual report to determine whether dividends have been paid on the preferred stock each year. Are there
dividends in arrears? Write a report to your instructor summarizing your findings. Also be prepared to make a short
presentation to the class.
Group project G In a group of one or two students, contact state officials and/or consult library resources to
inquire about the incorporation laws in your state. Determine your state laws regarding the issuance of stock at an

amount below par value, how legal capital is determined, and the requirements and government fees for
incorporating a company in your state. Write a report to your instructor summarizing the results of your
investigation and be prepared to make a short presentation to your class.
Using the Internet—A view of the real world
Visit the following website for Macromedia:

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