The Shepersky Corporation was authorized to issue 2,000,000 shares of $0.01 par value common stock and 200,000 shares of $50 par value, 10 percent preferred stock. To date, Shepersky has issued 600,000 shares of common stock and no preferred stock. Shepersky is contemplating the acquisition of a new piece of equipment and wants to issue stock to raise the $200,000 cash to finance its acquisition. The company is trying to decide whether to issue 10,000 shares of common stock or 4,000 shares of preferred stock.
A. Describe how the issue of each type of stock would affect the stockholders’ equity of Shepersky Corporation.
B. If Shepersky generates about $3,600,000 of net income each year and the new machine can generate an additional $40,000 of after-tax income, how will the earnings of the common shareholders be affected if:
1. Preferred stock is issued?
2. Common stock is issued?