Question

Ace Products sells marked playing cards to blackjack dealers. It has not paid a dividend in many years, but is currently contemplating some kind of dividend. The capital accounts for the firm are as follows: Common stock (2,400,000 shares at $5 par) $ 12,000,000 Capital in excess of par* 9,000,000 Retained earnings 24,000,000 Net worth $ 45,000,000 *The increase in capital in excess of par as a result of a stock dividend is equal to the new shares created times (Market price − Par value). The company’s stock is selling for $10 per share. The company had total earnings of $2,400,000 during the year. With 2,400,000 shares outstanding, earnings per share were $1. The firm has a P/E ratio of 10. 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 end up with if he or she originally had 100 shares? (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.)

Answer 1

PART A
		Notes
Common Stock ((2,400,000 + 240,000) x $5)	$13,200,000	240,000 new shares at $5 par value
Capital in excess of par ($9,000,000 + 240,000 x ($10 - $5))	$     10,200,000	240,000 new shares at $5 excess of par
Retained earnings ($24,000,000 - $2,400,000)	$21,600,000	Stock dividend (240,000 x $10) financed entirely from current year's net income
Net Worth	$45,000,000.00
PART B
EPS = Net Income / No. of shares outstanding
= $2,400,000/ 2,640,000 shares
= $0.91 per share (Answer)
Stock price = EPS x (P/E Ratio)
=0.909*10
= $9.09 per share (Answer)
PART C
No. of shares after stock dividend = Original holding x (100% + Stock dividend percentage)
= 100 x (100% + 10%)
= 100 x 110%
= 110 shares (Answer)
PART D
Worth before stock dividend = 100x $10 per share
= $1,000
Worth after stock dividend = 110 x $9.09 per share
= $999.9 or $1,000 (Answer)