Business case (100 points)

At 31^st of December 2019, John owned 25% of the common stock capital of a company called Empires Investment Ltd.

The company focuses on the local real estate market and shows increasing profits year after year.

At the beginning of the year 2020 the company presented the following Balance sheet:

Empires Investments Ltd

Assets

Cash 2.005.000,00 Land 200.000,00 Building 1.200.000,00 Acc Depreciation Building -200.000,00 Real Estate available for sale 2.500.000,00 Construction in progress 2.300.000,00 Total Assets 8.005.000,00

Liabilities 3.250.000,00

Long term note payable 1.000.000,00 Accounts Payable 2.250.000,00 Owners equity 4.755.000,00

Capital Stock (4.000.000 shares with 1$ par value) 2.000.000,00 Retained earnings 2.755.000,00

Total liabilities + Owners equity 8.005.000,00

During the first months of the year, John heard the company made the following operations that may affect the situation of the ownership of the company:

On 24 of January the company decided a 10% stock dividend distribution to its stockholders on record at 25^st of February, to be paid on 15 of March. The market value of the shares was estimated to 10 per share on 24 of January.

On 1st of March the company purchased 200.000 of its owns shared at a price of 10 per share

In order to invest in a new project, the company decided to increase its financing issuing on 4^th of April 1,000,000 preferred stock with a 15 face value. Said preferred stock will offer a 20% cumulative dividend.

On 1^st of May, the company reissued 50% of the stocks purchased on 1^st of March at a price per share of 12.

The forecast presented by the board of the company during the last stockholders meeting showed the following perspectives of net income taking into account the new projects to be carried on in 2020.

Empires Investments Ltd NET INCOME FORECAST

Year Net Income Div/Share 2020 120.000,00 0,06 2021 350.000,00 0,18 2022 12.200.000,00 6,10 Total 12.670.000,00 6,34 Average/Year 2,11

John, who is a conservative investor, is worried about the different movements in the stockholders equity section of the company registered during the first months of the year and asks you how the different operations described below may affect his investment into the company.

In particular, John would like to know the following:

1. What are the journal entries to be made by the company to register all the operations mentioned below (40 points)
2. Calculate the amount of cash dividend payment for preferred stock to be expected at the end of the years 2020, 2021 and 2022. ? Justify your answers and calculations. (10 points)
3. Assuming the forecast prepared by the directors of the company is correct regarding the net income, would the cash dividends to be expected remain the same taking into account the different movements described below? Calculate the amount of cash dividend payment per share of common stock to be expected at the end of the years 2020, 2021 and 2022. ? Justify your answers and calculations. (25 points)
4. Instead of issuing preferred stock on 4^th of April, the company had the possibility to issues 15,000 of 8% Bonds of 1,000 face value. Calculate the earning per share of common stock considering the company would have issued the bond instead of the preferred stock (explain your calculation). Do you agree with the board of Directors choice for the preferred stocks? (Justify your answer). (25 points)