Question

Stock dividend versus stock split Firm The board of Wicker Home Health Care, Inc., 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 present time, the firm's equity account and other per-share information are given as follows: a. Show the effect on the equity accounts and per-share data of a 20% stock dividend. b. Show the effect on the equity accounts and per-share data of a 5-for-4 stock split c. Which option will accomplish Wicker's goal of reducing the current stock price while maintaining a stable level of retained earnings? d. What legal constraints might encourage the firm to choose a stock split over a stock dividend? a. Show the effect on the equity accounts and per-share data of a 20% stock dividend. The number of shares of common stock after the dividend is shares (Round to the nearest whole number) The balance in the common stock account after the dividend is $(Round to the nearest dollar) The balance in the paid-in capital in excess of par account after the dividend is $(Round to the nearest dollar) The balance in the retained earnings account after the dividend is (Round to the nearest dollar) The price per share of common stock after the dividend is $ (Round to the nearest cent)

Answer 1

Given info

Common Stock 300000 share of $1 each = $300000
Par Value
Paid in capital in excess of par = $800,000
Retained earning =$17,40,000
Price per share = $24
Earning per share = $3.5
Dividend per share = $1.59
Market Cap = 300000*24 =$7,200,000

a
Stock dividend = 20% = 60000
Amount will be deducted from Retained earning and credited to common stock

1. No. of shares of common stock after dividend = 300000+60000 = 360000 shares($1 Par)

2.The balance in common Stock account after dividend = $300000+$60000= $360,000 ($360000 shares of 1 each)

3. The balance in Paid in capital in excess of par account after dividend = $800,000 -0= $800,000

4. The balance in Retained earning account after dividend = $17,40,000 -$60000 = $16,80,000

5. Market Cap = 300000*24 =$7,200,000
No. of shares = 360000 shares($1 Par)

Price per share after dividend = $7,200,000/360000 shares = $20 per share

6.Earning for Equity = 300000*3.5 =$1,050,000
No. of shares = 360000 shares($1 Par)

Earning per share after dividend = $1,050,000/360000 shares = $2.92 per share

b
Stock split = 5 for 4
Earlier Common Stock 300000 share of $1 each = $300000
Afer Stock split 300000*5/4 = 375000 shares
Revised face value Stock split = 1*4/5 = $0.8

Amount will be debited from common stock and credited to common stock

1. No. of shares of common stock after stock split = 300000*5/4= 375000 shares($0.8 Par)

2.The balance in common Stock account after stock split = $300000 ($375000 shares of 0.8 each)

3. The balance in Paid in capital in excess of par account after stock split = $800,000 -0= $800,000

4. The balance in Retained earning account after stock split = $17,40,000 (no change)

5. Market Cap = 300000*24 =$7,200,000
No. of shares = 375000 shares($1 Par)

Price per share after stock split = $7,200,000/375000 shares = $19.2 per share

6.Earning for Equity = 300000*3.5 =$1,050,000
No. of shares = 375000 shares($1 Par)

Earning per share after stock split = $1,050,000/375000 shares = $2.8 per share

c. The Correct Option is A. The Stock Split will accomplish the goal of reducing the stock price while maintaining a stable level of retained earning.

The Goal of reducing the current stock price while maintaining a stable level of Retained earning can only be fullfiled by stock Split Option.

As we can see from above 2 parts, stock price per share is reducing from $24 under both options. But under stock dividend retained earning balance is also getting reduced by 60000, while under stock split, retained earning balance remains same at $17,40,000

d . The Correct Option is D. The Firm May be restricted in the amount of retained earning available for dividend payments , whether cash or stock dividends.

The Legal constraint that might encourage the firm to choose a stock split over a stock Divident is in the stock dividend as the firm will be restricted in amount for dividend payment to the limit of Retained earning avilable