Compact Computing Company Compact Computing Company (CCC) was formed in 2003 by Mike Ling and Joe Parker. The two were previously employees at Intercontinental Computer Corporation. Mike and Joe believed that they could develop an E-reader that could provide satisfactory performance at a relatively low price. They started the new company with their combined savings and personal borrowings ($70,000 from Mike, $80,000 from Joe). CCC was incorporated on July 1, 2003. 20,000 shares with a par value of $1 were issued to Mike, while 80,000 shares were issued to Joe. A local bank agreed to provide a line of credit. CCC had no revenues in 2003 or 2004. Expenses (consisting of research related expenditures and de- preciation on buildings and equipment) totaled $170,000 in 2003 and $400,000 in 2004. The company was able to remain in existence only because Sam, a venture capitalist known to Joe, invested $450,000 in the firm in 2004, in exchange for 250,000 shares. However, by the end of the year, the company was able to develop a prototype for their device that showed considerable promise. In 2005, the company made its first sales. Net income for the year amounted to $50,000. Then, in 2006, CCC went public. In anticipation of the offering, the company issued a 10-for-1 stock split in January. In early February, the company offered 8 million shares to the public at a price of $5 per share. Total costs of the issue, including investment banker's fees, amounted to $4 million. All the offered shares were pur- chased, and the price of the shares rose to $7 by the end of the day on which they were issued. 2006 was a good year for operations. Net income amounted to $2.4 million. At the end of the year, the company de- clared a dividend of 2 cents per share. The dividend was paid in early 2007. The company's stock performed impressively in the first half of 2007. The price reached a high $15 in September. Shortly thereafter, however, the market crashed, and CCC's stock traded as low as $4. Earn- ings for 2007 amounted to $6 million. In 2008, Intercontinental Computer Corporation offered to acquire all of the company's stock for $20 a share, at a time that the stock was trading at $11. CCC rejected the offer, but decided to buy back 2 million shares. The total cost of the share purchases, which were made over several months, amounted to $30 mil- lion. To help pay for the purchase, on July 1, the company issued 250,000, 10 percent cumulative, converti- ble preferred shares at par ($100) to a group of private investors. Each preferred share was convertible into four shares of common stock at any time after the end of 2008. Net income in 2008 was $10 million. Because of a tight cash position, dividends on common shares were omitted (although they were paid on preferred shares). The company wanted to declare a 10 percent stock dividend, but was informed by its auditors that the balance in retained earnings was insufficient for this purpose. At the time, CCC's common stock was trading at $18. 2009 net income was $16 million. A dividend of $1.20 per share was declared on common stock at the end of the year. Assignment 1. For each year in the life of the company, describe the key financial decisions that were made and speculate, where appropriate, about the underlying reasoning. 2. Prepare a statement showing the stockholders' equity account balances at the end of each year, starting the incorpor- ation of the company, and showing the impact of each of the decisions that you described in answering Question 1. 3. What were earnings per share for each year? 4. What is the book value of the company's stock on December 31, 2009? 5. Why was the company unable to declare a 10 percent stock dividend in 2008? Compact Computing Company Compact Computing Company (CCC) was formed in 2003 by Mike Ling and Joe Parker. The two were previously employees at Intercontinental Computer Corporation. Mike and Joe believed that they could develop an E-reader that could provide satisfactory performance at a relatively low price. They started the new company with their combined savings and personal borrowings ($70,000 from Mike, $80,000 from Joe). CCC was incorporated on July 1, 2003. 20,000 shares with a par value of $1 were issued to Mike, while 80,000 shares were issued to Joe. A local bank agreed to provide a line of credit. CCC had no revenues in 2003 or 2004. Expenses (consisting of research related expenditures and de- preciation on buildings and equipment) totaled $170,000 in 2003 and $400,000 in 2004. The company was able to remain in existence only because Sam, a venture capitalist known to Joe, invested $450,000 in the firm in 2004, in exchange for 250,000 shares. However, by the end of the year, the company was able to develop a prototype for their device that showed considerable promise. In 2005, the company made its first sales. Net income for the year amounted to $50,000. Then, in 2006, CCC went public. In anticipation of the offering, the company issued a 10-for-1 stock split in January. In early February, the company offered 8 million shares to the public at a price of $5 per share. Total costs of the issue, including investment banker's fees, amounted to $4 million. All the offered shares were pur- chased, and the price of the shares rose to $7 by the end of the day on which they were issued. 2006 was a good year for operations. Net income amounted to $2.4 million. At the end of the year, the company de- clared a dividend of 2 cents per share. The dividend was paid in early 2007. The company's stock performed impressively in the first half of 2007. The price reached a high $15 in September. Shortly thereafter, however, the market crashed, and CCC's stock traded as low as $4. Earn- ings for 2007 amounted to $6 million. In 2008, Intercontinental Computer Corporation offered to acquire all of the company's stock for $20 a share, at a time that the stock was trading at $11. CCC rejected the offer, but decided to buy back 2 million shares. The total cost of the share purchases, which were made over several months, amounted to $30 mil- lion. To help pay for the purchase, on July 1, the company issued 250,000, 10 percent cumulative, converti- ble preferred shares at par ($100) to a group of private investors. Each preferred share was convertible into four shares of common stock at any time after the end of 2008. Net income in 2008 was $10 million. Because of a tight cash position, dividends on common shares were omitted (although they were paid on preferred shares). The company wanted to declare a 10 percent stock dividend, but was informed by its auditors that the balance in retained earnings was insufficient for this purpose. At the time, CCC's common stock was trading at $18. 2009 net income was $16 million. A dividend of $1.20 per share was declared on common stock at the end of the year. Assignment 1. For each year in the life of the company, describe the key financial decisions that were made and speculate, where appropriate, about the underlying reasoning. 2. Prepare a statement showing the stockholders' equity account balances at the end of each year, starting the incorpor- ation of the company, and showing the impact of each of the decisions that you described in answering Question 1. 3. What were earnings per share for each year? 4. What is the book value of the company's stock on December 31, 2009? 5. Why was the company unable to declare a 10 percent stock dividend in 2008