Early in 2008, Septa, Inc., was organized with authorization to issue 1,000 shares of $100 par value preferred stock and 200,000 shares of $1 par value common stock. Five hundred shares of the pre- ferred stock were issued at par, and 80,000 shares of common stock were sold at $15 per share. The preferred stock pays a 10 percent cumulative dividend.

 

During the first four years of operations (2008 through 2011), the corporation earned a total of

 

$1,800,000 and paid dividends of 40 cents per share in each year on its outstanding common stock.

 

 

 

Instructions

 

a.       Prepare the stockholders’ equity section of the balance sheet at December 31, 2011. Include a supporting schedule showing your computation of the amount of retained earnings reported. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)

 

b.       Are there any dividends in arrears on the company’s preferred stock at December 31, 2011? Explain your answer.

 

c.        Assume that interest rates increase steadily from 2008 through 2011. Would you expect the market price of the company’s preferred stock to be higher or lower than its call price of $110 at December 21, 2011? (The call price is the amount the company must pay to repurchase the shares from the stockholders.)