Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: Common stock (3,500,000 shares at $10 par) Capital in

image text in transcribedimage text in transcribedimage text in transcribed

Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: Common stock (3,500,000 shares at $10 par) Capital in excess of par* Retained earnings $35,000,000 10,000,000 45,000,000 $90,000,000 Net worth *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 company's stock is selling for $28 per share. The company had total earnings of $7,000,000 with 3,500,000 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 15 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).) Capital Accounts Common stock Capital in excess of par Retained earnings Net wo $ 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 100? (Do not round intermediate calculations and round your answer to the nearest whole share.) Number of shares d. What is the investor's 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 $1.15 in spite of the fact that the stockholders now have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $28. What is an investor's total investment worth after the stock dividend if he/she had 100 shares before the stock dividend? Total investment f. Under the scenario described in part e, is the investor better off? O Yes No g. As a final question, what is the dividend yield on this stock under the scenario described in part e? (Input your answer as a percent rounded to 2 decimal places.) Dividend yield %

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Behavioral Finance And Investor Types

Authors: Michael M. Pompian

1st Edition

1118011503, 978-1118011508

More Books

Students also viewed these Finance questions