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Share Capital and Lock Box

2. The authorized share capital of the ABC Company is 500,000 shares. The equity is currently shown in the company's books as follows:

Common stock ($.50 par value) $ 200,000
Additional paid-in capital 1,000,000
Retained earnings 300,000
Common equity 1,500,000
Treasury stock (10,000 shares) 30,000
Net common equity 1,470,000

a. How many shares are issued?
b. How many are outstanding?
c. How many more shares can be issued without the approval of shareholders?

You are considering implementation of a lock-box system. You forecast that about 500 payments a day will be received by the lock-box system with an average payment size of $1,000. The bank's charge for operating the lock box is $0.30 a check. The interest rate (what you can earn on the freed up cash) is 0.025 percent per day.

a. If the lock-box system saves 1.5 days in collection float, is it worthwhile to implement the system?

b. What minimum reduction in the time to collect and process each check is needed to justify the use of the lock-box system?

Solution Preview

a. The number of issed shares can be found from the common stock line. The total common stock is $200,000 and the par vaue is $0.50. The number of shares issued is 200,000/0.5=400,000

b. Outstanding shares are what are available in the market. These are total shares issued less the treasury stock. The outstanding shares are ...

Solution Summary

The posting has two problems. One relating to calculation of shares issued and outstanding and the second one relating to implementing a lock box system