Question 1
Share Valuation
The board of Santova Ltd is exploring ways to expand the number of shares outstanding in an effort to reduce the
market price per share to a level that the firm considers more appealing to investors.
The options under consideration are a 20% stock dividend and, alternatively, a 5-for-4 stock split.
At the same time, the firms equity account and other per-share information are as follows:
Preferred stock	0
Common stock ( 100,000 shares at R1 par)	100000
Paid-in capital in excess of par	900000
Retained earnings	700000
Total stockholders' equity	1700000
Share price	R30
EPS	R3,60
DPS	R1,08
P/E	R8,33
a) Show the effects on the equity account, EPS and P/E ratio of a 20% of a stock dividend.
After stock 20% dividend
Preferred stock
Common stock ( )		[2]
Paid-in capital in excess of par		[2]
Retained earnings		[2]
Total stockholders' equity	0	[2]
Change in price		[1]
Net Income		[1]
Change in EPS		[1]
b) Show the effect on the equity accounts, EPS and P/E ratio of a 5-for-4 stock split.
After 5-for-4 stock split
Preferred stock
Common stock ( )		[2]
Paid-in capital in excess of par		[2]
Retained earnings		[2]
Total stockholders' equity	0	[2]
Change in price		[1]
Change in EPS		[1]
Change in the number of Outstanding shares		[1]