Q39PGA_3 - Horngren'S Financial And Managerial Accounting

Question

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of \(350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)5 par common stock and anticipate an initial market price of \(20 per share, how many shares will they need to issue to raise \)2,750,000?

Step-by-Step Solution

Answer

The company need to issue 137,500 shares to raise $2,750,000.

Step 1: Basic Introduction

Initial market price: $20 per share

To raise: $2,750,000

Step 2: Computation

$\begin{array}{rcl}\mathbf{Numberofshares}& \mathbf{=}& \frac{\mathbf{Totalvalueofshares}}{\mathbf{Marketpricepershare}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{750}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{20}}\\ & \mathbf{=}& \mathbf{137}\mathbf{,}\mathbf{500} \mathbf{shares}\\ & & \end{array}$