Since violating debt agreements can be quite costly

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Unformatted text preview: any's stock is trading at too high a price, the average investor will not be able to invest in the company. If the price of the company's stock was lowered, trading in the company's stock would be stimulated. Consequently, a company can lower the price of its stock and stimulate trading in its stock by declaring a stock split. E12–16 a. Appropriating retained earnings serves to restrict a portion of retained earnings from the payment of future dividends. Appropriations of retained earnings usually arise for two reasons. First, a creditor may require the borrower to appropriate retained earnings. Such appropriations prevent the borrower from paying "excessive" dividends to the stockholders, thereby reducing the amount of cash available to repay creditors. Second, a company may decide to restrict future dividends and use the cash that would have otherwise been used to pay dividends to finance plant expansion and so forth. In this particular case, the company appropriated retained earnings for both of these reasons. Auditors would requir...
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