21. Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend.

The capital accounts for the firm are as follows:

Common stock (2,000,000 shares at $5 p a r).............. $10,000,000 Capital in excess of par*.............................................. 6,000,000 Retained earnings ...................................................... 24,000,000 Net worth............................................................... $40,000,000

*The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price - Par Value).

The company’s stock is selling for $20 per share. The company had total earnings of $4,000,000 during the year. With 2,000,000 shares outstanding, earnings per share were $2.00. The firm has a P/E ratio of 10.

a. What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts.

b. What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.)

c. How many shares would an investor end up with if he or she originally had 100 shares?

d. Assume the payout ratio in each year is to be 30 percent of net income and the firm will pay a 20 percent stock dividend in years 2 through 5. How much will dividends per share for each year be?