On December 31, 2017, Nehpton Ltd. reported $3 million of common shares and $6 million of retained earnings. On that date, the company had five million shares authorized and two million outstanding. Management is considering a 10 percent stock dividend or a two-for-one stock split and would like to know the impact on the equity section of the two transactions.
a. Prepare the equity section of Nehpton’s balance sheet under the following conditions:
i. As originally reported;
ii. If management declared a 10 percent stock dividend;
iii. If management declared a two-for-one stock split.
b. Explain how earnings per share would be affected in each case. Which situation would be most attractive to the shareholders?