Case :

Jack is one of the shareholders of the company Webuild Ltd. dedicated to the construction of skyscrapers.

Jack is worried about the transactions decided by directors of the company during year 2020 affecting the composition of shareholders equity. He comes to ask you about how these transactions affect his personal financial interests into the company.

At first of January 2020, the stockholders Equity of Single & Sons Ltd. was only composed by 1,000,000 $2 par value common stocks outstanding and retained earnings for $200,000.

The 1st of March the company purchased 5% of its own stock to a shareholder. The purchase price was $5/share.

In order to finance new investments, the company issued on 2nd of March 1,500 3% cumulative preferred stocks of %1,000 par value. Preferred stock dividends to be paid annually each 31st of December.

On 1st of June, the company reissued half of the stocks purchased on 1st of March at a price of $7/share.

On 7th of July, the company reissued treasury stocks accounting for 1% of its total share capital at a price of $6/share

During year 2020, the net income after taxes of the company was $78,000.

The management of company presented in the last shareholders meeting a forecast of the net income after taxes as follows:

Year 2021: $250,000

Year 2022: $ 800,000

Year 2023: $ 1,000,000

Year 2024: $ 1,500,000

Year 2025: $ 1,700,000

Year 2026: $2,000,000

Corporation tax for years 2021 to 2026 to be considered is of 25% of net income

Questions:

1. Record the above mentioned transactions in the General Journal for year 2020.

2. Calculate and record in the general journal the preferred stock dividend and its payment for year 2020. Explain your calculations.

3. Following the forecast provided by the management of the company, calculate the maximum dividend per share of common stock for years 2021 to 2026. Explain your answer

4. Calculate the maximum dividend per share of common stock for years 2020 to 2026 in case preferred stocks would be non cumulative. Explain your answer

5. Instead of issuing preferred stocks, the company had the opportunity to sell 3% interest Bonds for $1,500,000 for financing its investments. Calculate the net income of the company in case it would have been financed selling bonds instead of preferred stocks and the maximum dividend per share of common stocks. Explain your calculation.

6. Explain the main differences between a bond financing and a preferred stock financing. Do you consider the decision of the management appropriate? Why?

7. The forecast presented by the managers of Webuild Ltd. depicts an expected increase of 500% of the market value of the common stocks of Webuild Ltd. for year 2026 as compared to 2020. How would this increase affect the stockholders equity section of Webuild Ltd.? Would it affect Jim the same way? Explain