Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows:
Common stock (4,000,000 shares at $10 par) | $ 40,000,000 | |
Capital in excess of par* | 25,000,000 | |
Retained earnings | 45,000,000 | |
Net worth | $110,000,000 | |
*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 $45 per share. The company had total earnings of $12,000,000 with 4,000,000 shares outstanding and earnings per share were $3.00. The firm has a P/E ratio of 15.
a. What adjustments would have to be made to the
capital accounts for a 10 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).)
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.)
c. How many shares would an investor have if he
or she originally had 90? (Do not round intermediate
calculations and round your answer to the nearest whole
share.)
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.)
e. Assume Mr. Heart, the president of Health
Systems, wishes to benefit stockholders by keeping the cash
dividend at a previous level of $1.05 in spite of the fact that the
stockholders now have 10 percent more shares. Because the cash
dividend is not reduced, the stock price is assumed to remain at
$45.
What is an investor’s total investment worth after the stock
dividend if he/she had 90 shares before the stock dividend?
f. Under the scenario described in part
e, is the investor better off?
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.)
a.
Account Titles | Debit | Credit | |
$ | $ | ||
1. | Retained Earnings ( 4,000,000 x 10 % x $ 45) | 18,000,000 | |
Common Stock Dividend Distributable | 4,000,000 | ||
Capital in Excess of Par | 14,000,000 | ||
2. | Common Stock Dividend Distributable | 4,000,000 | |
Common Stock | 4,000,000 |
New Capital Accounts:
Common Stock( 4,400,000 shares at $ 10 par) | 44,000,000 |
Capital in Excess of Par | 39,000,000 |
Retained Earnings | 27,000,000 |
Net Worth | $ 110,000,000 |
b. EPS = $ 12,000,000 / 4,400,000 = $ 2.727 per share.
Stock price = $ 2.727 * 15 = $ 40.905 or $ 40.91
c. An investor originally holding 90 shares would now have 99 shares.
d. Invetment worth before the stock dividend = 90 shares x $ 45 = $ 4,050.
Investent worth after the stock dividend = 99 x $ 40.91 = $ 4,050
e. Investment value after the stock dividend = 99 x $ 45 = $ 4,455.
f. Yes.
g. Dividend yield = Diividend per share / Market price per share = $ 1.05 / $ 45 * 100 = 2.33 %.
Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows:...
Health Systems Inc. is considering a 10 percent stock dividend. The capital accounts are as follows: Common stock (4,000,000 shares at $10 par)$40,000,000Capital in excess of par*25,000,000Retained earnings45,000,000Net worth$110,000,000*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 $45 per share. The company had total earnings of $12,000,000 with 4,000,000 shares outstanding and earnings per share were $3.00. The...
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