Question

DreamWorks Animation is in the business of family entertainment. In the 2011 Annual Report, the company reported the following information on stockholders' equity on its Balance Sheet: December 31, 2011 2010 In thousands Stockholders' equity: Class A common stock, par value S.01 per share, 350,000,000 shares authorized, 98,333,454 and 97,436,947 shares issued, as of December 31, 2011 and 2010, respectively .................................... S 983 S 975 Class B common stock, par value $.01 per share, 150,000,000 shares authorized, 10,838,731 and 10,838,731 shares issued and outstanding, as of December 31, 2011 and 2010, respectively. 108 108 Additional paid-in capital........ 1,023,405 979,177 Accumulated other comprehensive (loss) income............ (1,041) 11 Retained earnings............ 1,053,736 966,935 Less: Class A Treasury common stock, at cost, 25,139,548 and 23,834,081 shares, as of December 31, 2011 and 2010, respectively. (720,495) (688,324) Total stockholders' equity. $ 1,356,696 $ 1,258,882 Required: 1. Calculate the number of Class A shares outstanding as of December 31, 2011. 2. Assume that DreamWorks did not re-issue any of its treasury stock in 2011. How many Class A shares did the company purchase as treasury stock in 2011? 3. Assume further that all treasury shares were purchased in the open market by paying cash. Calculate the average cost per share that the company paid in 2011. 4. Assume that all new shares that the company issued in 2011 were sold for cash. Write down the journal entry to record stock issuance. 5. In June 2011, the stock price of DreamWorks suddenly dropped and the stock has been trading at below S22 throughout 2012. Suppose that the company needed to raise additional share capital in 2012. Was it be more likely to sell treasury shares or issue new shares? Briefly Explain.

Answer 1

1	Class A shares outstanding
	Class A common stock issued as on 31.12.2011	98,333,454
	Less: Class A Treasury common stock as on 31.12.2011	25,139,548
	Class A shares outstanding as on 31.12.2011	73,193,906
2	Treasury stock re purchased in 2011
	Class A Treasury common stock as on 31.12.2011	25,139,548
	Class A Treasury common stock as on 31.12.2010	23,834,081
	Treasury stock re purchased in 2011	1,305,467
3	Average Cost per share
	Value of Class A Treasury common stock as on 31.12.2011	720,495,000
	Value of Class A Treasury common stock as on 31.12.2010	688,324,000
	Net amount paid in 2011	32,171,000
	Treasury stock re purchased in 2011	1,305,467
	Average Cost per share	24.64

4	Journal
	Particulars	Dr/Cr.	Dr ($)	Cr ($)
	Bank A/c (98333454-97436947)*0.01	Dr	8,965
	To Class A Common Stock at par (983-975)*1000	Cr		8,000
	To Additional Paid up Capital-A (Balancing figure)			965
	(Being stock issued)

5. The company shall issue new shares because treasury shares were purchased at an average cost of $24.64/ share and shares are trading at lower than $22/share.