A Company with 100,000 Authorized Shares of $4 Par Common

question 24

Multiple Choice

A company with 100,000 authorized shares of $4 par common stock issued 40,000 shares at $8. Subsequently, the company declared a 4% stock dividend on a date when the market price was $12 a share. What is the amount transferred from the Retained Earnings account to Paid-in Capital accounts as a result of the stock dividend?

• A) $12,800
• B) $19,200
• C) $32,000
• D) $48,800

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Definitions:

Financial Leverage

A strategy involving the use of borrowed money to increase the potential return of an investment.

Operating Leverage

The use of fixed as opposed to variable cost in a firm’s cost structure.

Combined Leverage

Refers to the use of both operating and financial leverage by a company to assess the potential impact on earnings due to changes in sales.

Degree of Financial Leverage

A measure that quantifies the sensitivity of a company's earnings per share to fluctuations in its operating income due to the use of fixed cost financing.