Question
Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: Common stock (5,000,000 shares at $10 par) $ 50,000,000
Health Systems Inc. is considering a 15 percent stock dividend. The capital accounts are as follows: |
Common stock (5,000,000 shares at $10 par) | $ 50,000,000 | |
Capital in excess of par* | 35,000,000 | |
Retained earnings | 55,000,000 | |
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Net worth | $140,000,000 | |
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*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 $48 per share. The company had total earnings of $12,000,000 with 5,000,000 shares outstanding and earnings per share were $2.40. The firm has a P/E ratio of 20. |
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).) |
Common stock | $ | |
Capital in excess of par | ||
Retained earnings | ||
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Net worth | $ | |
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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 | $ | |
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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 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 | $ | |
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e. | Assume Mr. Heart, the president of Health Systems, wishes to benefit stockholders by keeping the cash dividend at a previous level of $1.10 in spite of the fact that the stockholders how have 15 percent more shares. Because the cash dividend is not reduced, the stock price is assumed to remain at $48. |
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What is an investors total investment worth after the stock dividend if he/she had 100 shares before the stock dividend? |
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