Question

5. Below is the common equity section (in millions) of Timeless Technology’s last two year-end balance sheets: 2018 2017 Common stock 2,000 1,000 Retained earnings 2,000 2,340 Total common equity $4,000 $3,340 The firm has never paid a dividend to its common stockholders. Which of the following statements is CORRECT? a. The company’s net income in 2018 was higher than in 2017. b. The firm issued common stock in 2018. c. The market price of the firm's stock doubled in 2018. d. The firm had positive net income in both 2017 and 2018, but its net income in 2018 was lower than it was in 2017. e. The company has more equity than debt on its balance sheet.

Answer 1

Answer:

(B) The firm issued common stock in 2018

Explanation:

Given that the firm's common stock doubled from $1,000 to $2,000 from 2017 to 2018, it is reasonable to assume that the firm issued common stock in 2018.

Option A is incorrect as the firm's net income was likely lower and, more likely, negative in 2018. A decline in retained earnings from 2017 to 2018 by $340 suggests that the firm likely made a net loss of $340 in 2018.

Option C is incorrect because market prices of a firm's own common stock are not accounted for in its shareholders' equity. Only the book value are account for.

Option D is incorrect because the net income in 2018 was likely negative due to the year-on-year decline in the retained earnings

Option E is incorrect as we cannot ascertain it the firm has more equity than debt because sufficient information to reach that conclusion was not provided.