Question
25) Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows: Common stock (6,000,000 shares at $10 par) $
25)
Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows: |
Common stock (6,000,000 shares at $10 par) | $ 60,000,000 | |
Capital in excess of par* | 35,000,000 | |
Retained earnings | 75,000,000 | |
Net worth | $170,000,000 | |
*The increase in capital in excess of par as a result of a stock dividend is equal to the shares created times (Market price Par value). |
The companys stock is selling for $28 per share. The company had total earnings of $12,000,000 with 6,000,000 shares outstanding and earnings per share were $2.00. The firm has a P/E ratio of 14. |
a. | What adjustments would have to be made to the capital accounts for a 10 percent stock dividend? Show the new capital accounts.(Do not round intermediate calculations. Input your answers in dollars, not millions (e.g. $1,230,000).) |
Common stock | $ |
Capital in excess of par | |
Retained earnings | |
Net worth | $ |
b. | What adjustments would be made to EPS and the stock price? (Assume the P/E ratio remains constant.)(Do not round intermediate calculations and round your answers to 2 decimal places.) |
EPS | $ |
Stock price | $ |
c. | How many shares would an investor have if he or she originally had 90?(Do not round intermediate calculations and round your answer to the nearest whole share.) |
Number of shares |
d. | What is the investors total investment worth before and after the stock dividend if the P/E ratio remains constant?(Do not round intermediate calculations and round your answers to the nearest whole dollar.) |
Total Investment | |
Before stock dividend | $ |
After stock dividend | $ |
e. | Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.05 in spite of the fact that the stockholders how have 10 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $28. |
What is an investors total investment worth after the stock dividend if he/she had 90 shares before the stock dividend? |
Total investment | $ |
f. | Under the scenario described in parte, is the investor better off? | ||
|
g. | As a final question, what is the dividend yield on this stock under the scenario described in parte?(Input your answer as a percent rounded to 2 decimal places.) |
Dividend yield | % |
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