The Eastern Pipeline Company has the following capital section in its balance sheet. Its stock is currently selling for $6.00 per share, and the firms earnings last year were $27,750.

Common Stock (50,000 shares) $100,000

Retained Earnings $100,000

total $200,000

(Note: Before you answer the questions, calculate the Price-Earnings Multiple for the firm, and use it for the entire problem.)

You currently own 750 shares in the company (portfolio below).

Stock (750 shares) $ 4,500

Cash 000

total $ 4,500

The firm intends to first declare a 12 percent stock dividend, followed by a $0.25 cash dividend thereafter.

Three Questions

1. Show the capital section (including the number of shares) of the firms balance sheet after both dividends are paid out. (Do your calculations sequentially, stock dividend first, not together.)

2. Use the P/E multiple you computed at the beginning to estimate of the new stock price after the two dividends are paid. (Assume that the cash dividend will dilute the value of the shares.)

3. Show your new portfolio (stock and cash) after the two dividends are paid.